Episode 41: Why profits matters

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Here are seven more reasons why you might want a lot more profits. Full transcript below…

Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment, and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website businessnumberspodcast.com.

In a previous episode I talked about why you shouldn’t focus on minimizing profits to minimize tax and I also mentioned the often overlooked benefits of a $3 million tax bill. Here’s a few more reasons why you might want a lot more profits, whole why profits matter. 

First, a return for owner you as opposed to you, the worker working in the business, doing some role in the business, you, the person who owns the business. Well, this is an asset. Your business is an asset and you deserve a return on that asset. With profits, you can pay yourself a wage, fee, dividend distribution, whatever. Doesn’t matter which way you classify it on your tax return, the point is more profits allow you to pull money out. Don’t forget also that work or you needs to be paid fairly too, so don’t pay yourself less than mockery just to make your profits look better. More on that in a different episode.

Another reason for profits is to impress investors and potential buyers of your business. If you want to sell all or part of your business, then more profits mean a better evaluation in most circumstances.

Another reason for more profits is getting and repaying loans. Only the interest portion of a loan repayment shows up as an expense, and the interest portion lowers your profit. The principal portion of their repayments, that is the part that reduces the loan balance itself, well that comes from profit. And if you have no profit, you can’t repay a loan and you can imagine how happy a lender or potential lender will feel about that situation.

Fourth reason is savings. Profit is money that you haven’t spent. It’s kind of the definition of savings, really. If you want to build up savings to get you through a slow period, or build a war chest to capitalize on opportunities, or hire or invest in advance of growth, then you need some profits.

Five, working capital. This is the money that sits in your business bank accounts. Business needs to put money away to handle the time between paying for your marketing and getting a return on that marketing, like a client or customer paying you, or working capitals are also often used like your stashing-away savings from a busy period for a quiet period. Profits help you build up a good working capital buffer.

Number six, asset purchases. How do you pay for replacing your assets? Well, usually you use your savings, but you get investors or lenders like I’ve already mentioned, and all of those require profits. Even if your business assets are just computers, or phones, tablets, you’re going to need to pay for those eventually. Or maybe you might want to invest in other assets to grow business and you’ll need profit for that. 

And seven, business growth. If your business is unprofitable now it might not be able to fund growth, which, again, requires savings, working capital, lenders, investors, like I’ve mentioned, or your business may be even more unprofitable at scale.

Some people just assume that once they reach a certain scale or level of revenue, or volume of clients, or customers, or products, or services or whatever, some people just naturally assume that it’s going to be profitable. Yes, it will probably be cheaper, not always, but probably it will be cheaper for you to run your business and it’s at scale per customer or per client, but that doesn’t necessarily mean it will be profitable. So if you want your business to grow, profits now is a good sign that business growth won’t send you broke. So that’s seven more reasons why you might want profits and why our profits matter. 

Any ‘a-ha’ moments to share? Let me know something you didn’t consider before, or what’s your current focus? Like what’s the big ‘why’ for you to generate profits out of this list or something that wasn’t in this list? Let me know. 

Thanks for listening to the Business Numbers podcast. Subscribe in iTunes, Stitcher, or on our website businessnumberspodcast.com. Also on the website is a free basic concept webinar and a contact form for submitting questions that you’d like me to answer on a future episode.

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