As a business coach, one of the questions I ask my business clients is “why do you want to start a business?” I get various answers from “so I can help people”, “so I can be my own boss” and “I want to be in control of my financial future”. While these answers sound good, they all will lead to trouble in your business down the road. As cynical as this sounds, the only valid reason to start is to create profit for yourself.
Let me explain.
With the answers given above, how can do any of those without being profitable? You can’t help others without making a profit. If you help others, but continue lose money, you will go out of business. If you are out of business, how can you help others? The same is for the other answers above.
Profit is what allows you do whatever dream, goal or vision you have for your business. Therefore, before starting any business venture, you need to research whether you can be profitable or not. A business has no other goal than to be profitable for the owners and stockholders. Is don’t matter what your vision is, if you can’t do with a profit, then it is not worth doing. If you continue to lose money month after month, year after year, then you are only hurting yourself, your stockholders (if you have any) and your family.
So, how do measure profit? For this post, I will define earnings before taxes (EBT). EBT = sales revenue – cost of goods sold – all other expenses, except taxes.
We have defined EBT, so how do you determine how much your sales revenue your business needs to achieve a profit? Lets say you start a business with an inventory of items to sale of $4,000.00, a website for $1,500.00 and you want a salary of $30,000.00 (yes, you have to add that in – it costs your time to sale your product, it is part of your expenses). So, EBT = sales revenue – 4,000 – 1,500 – 30,000. To have EBT, you would need to have revenue of more than $35,500 for the year. Your salary is especially important if you are replacing your salary (or income) with your business.
So, to me that is why I say profit is the reason you start a business. You must have profit to help others, be your own boss or be in control of your financial future. Without profit, you are at mercy of others as your business slowly goes under, potentially taking you with it.
Let me know what your thoughts by leaving a comment below.