Profits

Profitability has long been a discussion topic. Here are some of the frequently asked questions and one set of responses.

What are profits?

In simplest form profits are what remains after expenses are subtracted from sales. If the remainder is positive the company makes a profit. If the result is negative the company sustains a loss. For start-ups this simple definition is actually useful. Profits defined this way have a close tie to cash flow. If you are making a simple profit, you are bringing in cash faster than you are spending it.

Mature or complex companies can not fit such a simple idealized model. But even they must look at cash flow daily to ensure that there is sufficient cash to meet short and long-term plans.

Why be profitable?

A Company needs profits to exist. In a start-up, investors, lenders, and suppliers provide sources of cash. Lenders and suppliers must be paid back. The investment money is used for this and to pay employee's salaries but it eventually runs out. Profits are what provide the cash to sustain the company.

Profits represent the creation of real $ value in a company. By increasing the $ value of a company both investors and employees benefit directly. The value of shares owned by investors and employees increases in direct relationships to profits.

How does a company make a profit?

Businesses exist to deliver products to markets. To continue to exist, business must make a profit. In order to make a profit businesses must charge a price that is greater than the cost of production.

The price of a product expresses the manufacturer's belief in the value of the product to the customer. By paying this price, the customer is saying that they expect the benefits they receive from using the product to be worth the price. A sustainable business will emerge only if the customer's perception of value at time of purchase is met or exceeded by actual use.

Profit and then growth are driven primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value provided the customer.

To make a profit, companies must offer products that deliver value to customers that exceed the price they paid.

When should start-ups turn profitable?

Starting with no products, a company must invest to develop them. The biggest risk during development is developing a product the customer does not want or will not buy at a profitable price. The safest approach is to get to market quickly, price the product to make a profit and let the customer vote yes or no with their wallets.

Which is more important growth or profits?

A Company needs cash to survive. Cash can come from profits, lenders, suppliers, and investors. A Company without profits eventually loses its investors. Without investors or profits, lenders and suppliers can not be paid. Profits must come first.