Many businesses, especially start-ups or relatively young businesses, make the mistake of not developing a culture of profit-making from day one. A profit culture is one that puts the need for profit at the centre of all decision-making with an understanding that every rand that the business spends needs to have a return.
Businesses that do not establish and entrench a culture of profit will always be vulnerable to losses as money and resources could be squandered on non-essential expenditure and assets. During tough economic times this vulnerability is more easily exposed. Business planning and analysis is a large part of what an accountant should do as well as engaging with many business owners who are currently making losses in their business.
Frequently business owners indicate that if they can grow their customer base by 10% or purchase capital equipment to increase production their businesses will recover to profitability. Only on rare occasions will the economics of scale save a loss-making business. In most instances following such a course accelerates the business demise because of the fundamental problem that if you are unprofitable as a small business how will you be successful if you grow?
Many business owners focus on expanding their businesses, thinking that this is going to make them successful, rather than concentrating on how they are going to make a profit. Too many people sacrifice profit for growth instead of understanding that it is profit that first leads to growth. In this urgency for growth, business owners make the following common mistakes:
- Installing a new, expensive IT system and upgrading the current IT equipment
- Upgrading the business premises either via a purchase, lease or even redecorating
- Purchasing of non-essential or under-utilized capital items
- Underestimating the drain on cash resources of offering larger customers payment terms and settlement discount
- Underestimating the cost of the increase of investment in working capital
- Rushing into hiring people without evaluating the overall need
If business owners were to prioritize profits and put profit at the centre of their decision-making, the above mistakes would be avoided as they would be replaced by value-based decisions.
It was Oscar Wilde who wrote “A cynic is a man who knows the price of everything and the value of nothing”. A key component of creating a profit culture is one of value-based spending. Spending that rand and getting a return represents good value; spending that rand and getting less back represents poor value. With this in mind, goods and services are no longer cheap or expensive; they are either good value or poor value. The profit culture insists that business money and resources are directed only towards obtaining good value, no matter how cheap something appears to be.
The major benefit of creating a profit culture is the reduction of risk by ensuring that the business is sustainable on a transaction-by-transaction basis.
Having read the CB insights article “51 statutory failure post-mortems”, it is significant to note that “lack of profitability” was never mentioned as a reason for failure but there was also not one consideration of how they were going to make a profit. The natural knee-jerk reaction is to raise capital or borrowings but the adoption of a profit culture can change the way you do business instead, unlocking value with controlled growth while simultaneously creating profits.
Partner, Hobbs Sinclair Chartered Accountants