Less Can Be More!
In 2006, we worked hard to become profitable within the first 18 months of building Crankset Group. And the profits went up each year until 2010. Then they started going down and that’s when we got excited. It was a very good sign.
In every business there are cycles of numbers that we should focus on. It’s never neat and tidy, but in general, we followed different numbers at different stages in our business.
The Cycle of Numbers:
Startup? Watch Revenue most.
Don’t bother going through a lot of profitability scenarios until you find out if you can actually sell your widget. Nothing else matters at startup except revenue. Everything else is voodoo and fortune telling. Go sell something. If it doesn’t sell, forget all the rest of the numbers. Our services started selling regularly, so we moved to a new focus:
Early Stage Business? Watch Profitability most.
As soon as you figure out you can sell something, figure out if you can actually be profitable selling it at that price. The polish sausage vendor buys them for $1.00 and sells them for $.95, but thinks he’ll make it up in volume. He’ll just lose more money. Get a good accountant at this stage who can tell you how many widgets you will have to sell per month to be profitable. Then focus on getting there.
Finding Break Even? Focus on Profit
Profitability is theoretical. You’re just making sure you aren’t wasting your time building a business that won’t make it. But Profit is “real”. Figure out your profitability, then focus on nothing but getting to real profit. A good accountant should be able to tell you how long it will take based on selling x widgets/mth at $x per month. Once you break even and start making a profit, the fun begins.
Growing a real business? Focus on Cashflow.
When you finally start making a regular profit, that is a very dangerous stage. Why? Because it is the first time you have something to protect – profit – and you will tend to hunker down and protect it.
If you stop at simple profit based on your own production, you will never grow a real business. Instead of siphoning off the profits and buying a hot tub, it’s time to reinvest them in growing the business to where it can make money while you’re regularly on vacation, or bigger if that is your preference. The problem is that when you decide to grow your business, the profits you worked so hard to realize, will go down or even disappear for a time.
Growth will kill your profit – for a short time
Even though our business has grown 392% in the last four years, our personal income has gone down every year for the last three years. But rather than be concerned, we’re very excited because we understand the principle of growth: growth decreases profit and cash flow. The faster you grow, the less profit you will have right now, but a lot more later.
If you are making less profit because your revenues are bad or your margins are too low, that’s a big problem. But if your profits are low because you are growing quickly, get happy about it. Just watch your cash flow – fast growth can put you out of business if you don’t have enough cash on hand to pay your bills.
Growth slowing down? Watch your expenses
The final cycle – If you decide to stop growing (we plan to keep growing internationally), your profit and your cash flow will return, and if you’ve done it right, you’ll have a lot more of both than when you first starting seeing profit. At this stage, tweaking your expenses will only make you more money.
Make decisions based on where you want to be, not on where you are
Too many business owners focus on expenses early in their business and say this to themselves, “I can’t afford to hire that sales person, buy that truck, install that software, etc.” The problem is that you are looking at an investment (money that comes back in spades) vs. an expense (money that never comes back). When you make decisions based on where you are, you shouldn’t be surprised that you’ll be there again next year.
One final thought – watch cash flow during every number cycle – it can put you out of business at any time.
So don’t be afraid of the growth stage! Give up the profit for a time and grow. You’ll have a lot more of it later.