Contact Us

About Bill Collier

Helpful Business Links

E-Learning Center

Home

            

It's What You Keep - Part 1 of 2

As a business owner, your goal is to make a profit. Right?

So what exactly does it mean to “make a profit”? Here’s the number one definition for profit from Dictionary.com:

“Pecuniary gain resulting from the employment of capital in any transaction.”

Well, now that we’ve cleared that up, I could end this article right here and now. Trouble is, I’ve never heard of the word “pecuniary.” I also suspect this is a word that most readers don’t use on a daily basis. So let’s dig deeper.

“The ratio of such pecuniary gain to the amount of capital invested.”

I’m feeling the urge to start writing numbers in a two column ledger book with a sharpened #2 pencil. I hope the definitions get better soon. Here are the next two:

“Returns, proceeds, or revenue, as from property or investments.“

“The monetary surplus left to a producer or employer after deducting wages, rent, cost of raw materials, etc.”

Finally - something most of us can understand. That last definition sounds a lot like what most small business owners are striving for: Money left over after paying overhead expenses.

If we stop here and accept this definition, many readers would be able to declare their businesses “profitable” based on their income statements. After all, there’s the bottom line and if it’s positive, a profit has been achieved. Or has it?

Well, if you manage part of a business for someone else, showing a positive bottom line might be good enough. Let’s say you run the wholesale department for a small automotive muffler manufacturer. Your job is to sell enough products to muffler shops and auto parts retailers to cover your overhead expenses (salaries, benefits, your share of utilities and rent, and so on.) A simple bottom-line “profit” is all your employer asks.

But when all the departments’ numbers get rolled up and we look at the company-wide results, is a profit on the P&L statement good enough for the owner of the muffler manufacturing business?

What if the company is profitable but has little or no cash? How can such a thing happen? The direct answer is “Easily.” If cash is tied up in slow-moving inventory or in accounts receivable, a business can easily show a profit – even a substantial profit – and still run out of cash. It happens all the time. Maybe it has happened to you.

It sounds awful, and it is. But that’s not the worst part. Here’s the really bad news:

You still have to pay taxes on the “paper” profit shown on your income statement, even if you have no cash.

So, to add insult to injury you may have to borrow money for the sole purpose of paying income taxes.

How do you avoid such a gruesome fate? Sadly, you’ll have to wait for next month’s column when we discuss this in detail.

The fact is, entrepreneurs have two “profits” to watch: business and personal. On the business side, they have to ensure that not only is there a profit on the bottom line of the P&L, but also that there’s cash in the bank and things are generally coming up roses. On the personal side of the equation, they have to make sure that they are receiving adequate benefit from the enterprise to make it worth the investment of money, time and risk. (And when the tax man cometh, they need enough cash to pay up and still have some left over.)

This brings me to the next and perhaps most applicable definition of profit:

Advantage; benefit; gain.

A small business owner needs to take stock of his or her big picture – business and personal - and ask some tough questions. Am I receiving enough benefit from my monetary investment? From my investment of time? From my risk? Is our net worth growing every year? Is this business a net gain for my family?

If any of the answers is “no”, then the owner needs to determine what needs to be done to get on the right course.

Just remember that it’s not about what you make. It’s about what you get to keep.

Part 2

------------------------

Bill Collier is the author of “How to Succeed as a Small Business Owner … and Still Have a Life” and is the St. Louis area coach for The Great Game of Business. He helps businesses teach their employees to think and act like owners. He can be reached at 314-221-8558 or bill@collierbiz.com.

 

© 2005-2016 Collier Business Advisors, LLC       314-221-8558

Business Coaching & Consulting · Speaking & Training

Business Success Roundtable

Business & Financial Literacy Workshops · The Great Game of Business

 AddThis Social Bookmark Button