Real entrepreneurs don’t make profits, and for good reasons. Huge oil companies make excess profits, sure. Smart entrepreneurs don’t.
And I don’t mean just the land-grab web companies like Facebook and Twitter don’t make profits. Growing companies don’t make profits. Can you be more successful than amazon.com and Jeff Bezos? Amazon didn’t make profits until relatively recently. No, I mean small business everywhere.
Ideally, you do want enough in profits to support an increase in working capital, which would be a single-digit percent of sales. But that’s rare in growing companies.
Where do profits come from? Money you take in as sales that you don’t spend in cost of sales or expenses. And if you want to grow, then money that might have been profits goes right back into expenses as more product development, more marketing, more smart people on payroll.
When Palo Alto Software was growing at double-digit rates during its teenage years, I made the order of priorities as clear as I could: cash flow break-even first (we didn’t have outside investors); growth second; profits third.
Suggestion: on any kind of business relationship, take a step back, open your eyes, and look for compatible goals.
For example, one variety of hell is a startup with founders and investors having different goals. Differences on how to achieve goals are hard enough. You can talk out those differences. But when investors want one thing, and founders something else entirely, there’s trouble brewing. Companies can aim for growth, profits, or cash flow independence. Everybody involved should agree.
Use the framework of compatible goals to look at small business team members and compensation. That can be as simple as targets for gross margin (price less direct cost) instead of just sales. Years ago I hired an honest, ambitious, hard-working salesman with a compensation package tied to sales. He hit the sales targets by pricing deals so close to below cost that we didn’t have enough money to cover overhead. That was my fault, not his.
Use creative compensation schemes and bonuses. How can you make the goals of the customer service people compatible with the overall company goals? What do you do about targets, metrics, and bonuses? What about product development, as in programming? Editing? The more thought to compatible goals, the more likely to succeed.
You should also use the framework of compatible goals to look at business alliances. Do you want the same thing as those people from the other company? Can you both find a win? Are your goals for this deal compatible with theirs? Asking deeper questions about goals can lead to better, more useful negotiations.
One good step in strategy is understanding your business identity. Look in a conceptual mirror, at your business, not yourself; consider honestly what you see in that mirror. Who you are as a business, how you’re different, what you like to do, what you’re especially good at, and what you’re bad at.
This is like a fingerprint. It’s unique to you. Or, in this case, unique to your business.
Think about strengths and weaknesses. Think about core competence. What makes you special? What can you do for people that’s different or better than what anybody else can do?
You can’t do it in a vacuum. You have to do something other people will pay money for. It’s not all about you. Still, it’s a good first step. Start there.
At the same time, the rest of us can’t afford to demonize every investor or entrepreneur who seeks to make a profit. That drive is what has always fueled our prosperity, and it is what will ultimately get these banks lending and our economy moving once more.
Good point. Thanks Fred, and thanks Mr. President. Somebody should say it.
A Catch 22 on Banks
Talk about on again — off again — on again:
They wrote all those banking laws back in the first great depression when banks were caught speculating with depositors’ money. So banks weren’t allowed to invest in, say, a good business plan. Instead, they had to have collateral. The world wanted banks to play it safe.
Then in the great boom days of the last 10-15 years, banks were set free and they started using “yoopeee” as their philosophy of loan management. And we loved it. We said “Yoopee” too. That is, until they crashed and burned. And got bailed out with our money.
Now there’s a credit crunch and we want the banks to lend again. So do I. But do we want them to make bad loans, or risky loans? Isn’t that what got us into this mess.
And How Did Bonus Become a Bad Word?
OK I know the answer; anybody who hasn’t been living in a cave knows how bonuses got a bad name: excess and greed in large business. Bailouts and bankruptcies and lavish bonuses don’t go together. Thank you, big business, thank you, big banks, and, specifically, AIG; but they’re not alone.
But what about the rest of us, in small business, where a bonus is a reward for a job well done? Where people get an extra month or two of salary if — and only if — the company makes a profit? Bonus isn’t a bad word, or shouldn’t be. No profits, then no bonus.
This isn’t lavish excess. This is sharing profits, working and thinking as a team. And it’s a good thing, not a bad thing.