Profitability is one of those big terms that seems scary to a lot of mission-driven entrepreneurs. It can get complicated when you’re talking about profit and loss statements, balance sheets, and cash flow. Then add your mission into the mix and it gets super overwhelming. Having a triple-bottom-line is definitely more than a single bottom line. That’s why I’m sharing these thoughts today. Profitability doesn’t have to be scary, complicated, or overwhelming.
Why Profitability is Important
Before we jump into breaking down profitability to its most basic simple equation, I want to say a few words about why profitability is important.
Theoretically, we all understand that businesses need to make money. Yet, for so many mission-driven entrepreneurs, we tend to get so caught up in our mission that we lose sight of making money. Yet, if we want our mission to be fulfilled long term, we have to figure out how to make money and keep it going. You could continue to borrow money or sell equity but that’s (a) eventually going to dry up or run out and (b) isn’t very healthy for you or your business. To create a mission-driven business that you can work in for years or sell for a good amount, profitability is paramount. To summarize, if it’s not profitable, it’s not sustainable.
Plus, you might be aware of social enterprises that are still majority funded by government funding and are working to figure out their profitability in order to be less dependent on the shrinking government dollars available. They are well aware that government dollars for social services are shrinking. Profitability of social enterprises is a key ingredient for continuing the important and needed work of social service organizations.
Breaking Down Profitability
Okay, now we’re ready to break profitability down.
At its most basic, a business is profitable when its revenue is greater than its expenses. The more revenue is greater than expenses, the more profitable the business. I’m sure an accountant would say it’s way more complicated but for our purposes, making it this simple can be a really helpful for us entrepreneurs. Even a small increase in profitability can dramatically transform our businesses and our lives.
Let’s talk about some of the implications of this simple profitability equation:
if revenue > expenses, then profitable
To increase profitability,
- you can increase sales (but not increases expenses as much as you increase sales)
- you can decrease expenses (but not decrease sales as much as you decrease expenses)
There are so many ways to go about making your business more profitable. That’s why we created a list of 101 Strategies. You can download it at overflowyourpossibility.com/profitability.
A Key Factor in Profitability
There’s 1 key factor that you can’t forget in this equation: your pay, salary, distribution, or whatever you call it in your business. You might think that your pay can come from the profit. We learned the hard way that, as entrepreneurs heavily involved in the day-to-day operation of our business, we need to include what we’d like to (or should) get paid in the expense part of the equation.
At one point, we thought our business was profitable. Then, a wise person asked us if we are paying ourselves a sustainable wage yet. We said “no.” His response: “Then you’re not profitable.”
That put us to work to make our business more profitable so that we could include at least a livable salary in the expense side of the equation. So, simply on a piece of paper, we took our current revenue and expenses and added in the salary for ourselves. This made the expense side go up significantly. We could have easily gotten discouraged but instead we said, “We proud of getting this far. We built a business that’s relatively profitable. Now, let’s make it actually profitable.” It’s been hard work but not as much work as starting our business to begin with and we’re still not totally done.
Profitability is an Ongoing Journey
Profitability is one of those things that can always be improved. That’s part of why we put the list of 101 Strategies together. It’s something any mission-driven entrepreneur can go back to again and again when we are ready to take another step toward greater profitability in our businesses. You aren’t meant to do all 101 ideas. It’s a reference and brainstorm listing that can spark your creativity and help you decide the best way to make your business more profitable in every season or stage of business.
Don’t wait to download it when you think you’ll need it. Download it now and save it for future reference. You might take a quick look through it right away just to get familiar with the ideas. You never know what might give you an “Aha!” moment.
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