| 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
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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.
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