I’ve been working with several clients lately on understanding the difference between making money and making a profit. Truly understanding the difference between the two can mean keeping your doors open or walking away from the business.
To be honest, it’s easy to make money. I think that anyone can. But making a profit is much more difficult. See, I could probably make half a million in sales, but it would probably take me a million dollars to do it. Profit, on the other hand, is the money left over once all of the expenses, both variable and fixed, are paid. So spending a million to make a half million leaves me with a half-million loss, not exactly good profit finding skills.
It seems simple, but we see people making money instead of profit every day in their businesses. To increase or find better profit, there are only two things you can do; raise your prices or cut your costs.
Strategically, I only use raising prices as a last resort. Everyone has to raise their prices at some point and some industries and products raise their prices for other reasons besides increasing profit. Price can also reflect value, status, luxury or other marketing brands.
Normally, when I find profit shrinking or not meeting goals, I look at the costs. Cutting costs can sometimes be a much simpler solution to your profit woes. Additionally, there are some pretty obvious places to look for cost-cutting measures that won’t affect either quality or service for your customers.
The first place I always go to is inventory and/or supplies. Are we heavy on items that aren’t really necessary? Are we spending money on things that we either don’t need or rarely use? Is there a better model, such as just-in-time inventory or rent/lease items that we don’t use often?
An unfortunate example comes to mind. One company was struggling with paying bills and meeting its other financial obligations, although their sales weren’t all that poor. But a quick look at their operations saw that they had bought a lifetime supply of office stuff, including envelopes, paper clips, pencils, you name it! Their rationale was sincere. They got everything so much cheaper buying in bulk, but they used up so much of their money in doing so and cut into their overall profit.
There are other areas to review if you find you are having problems with finding profit. Look for strategies and operations where you can be more efficient, thereby saving dollars and increasing profit. Oftentimes, technology can be a large one-time cost that will pay for itself and decrease overall costs in the long run.
Wherever you look, the more you do to cut your costs, the more you do to find the profit in your company.