Why Profit is a lot like Sex

Why Profit is a Lot Like Sex

By Peter Rowe

Profit is a lot like sex. Everyone thinks there's a lot more of it than there really is - and that someone else is getting their share. And that's just among business owners!

 

What do your people know about profit?

Many employees have even more bizarre ideas about profit. Those range from the downright naive who think that "sales income" and "profit" are one and the same, to the relatively educated who think they know how much profit their enterprise makes but are unaware of (or ignore) the less obvious cost factors that must be met from it.

Those cost factors include depreciation, interest, taxation, finance, amortisation and accruals, all of which draw from initial profits and must be accounted for to arrive at a true measure of what the business actually made over and above the sum total of all of its costs.

Even when the relatively sophisticated know the true profit figure, it is unlikely that they look at it in the context of its destiny: to be retained by the enterprise for its future expansion, safety, or security; or to be disbursed to its shareholders as dividends in exchange for the use of the capital they provide to allow the enterprise to exist and function.

Profit matters because, in the game of business that as leaders we ask our people to play with us, our profit is our score for the game! It's the proof of how well we are playing! So, if you want your people to play their best, would it not be wise (preferably at some early point in the game) to educate them to understand the score so that they can protect and promote it on a day-to-day basis?

Planning for profit

Why might such a day-to-day focus be important?

Because profit is generated on a day-to-day basis, and it is eroded on a day-to-day basis. If there is an inadequate level of day-to-day profit awareness among your people, then a profit is unlikely to accidentally materialise on a Profit and Loss statement at the end of a month, quarter or financial year.

If profit is not planned, monitored and protected, it seldom just happens - and never happens consistently!

So, how do we build a sufficient degree of profit awareness into every one of our people without making the enterprise, and the roles and activities within it, "just about the money"?   

Educating for profit
We could start by educating our people about just what profit is so that we can have an open, informed and intelligent discussion about our joint responsibility to generate one!

If this is a little radical - if you feel a little exposed or threatened by the prospect of your people knowing how much your enterprise is making - it may help to realise that in the absence of correct information or real data, your people are going to make it up anyway! They will come up with their own ideas as to what the enterprise is making, and those ideas are usually way north of the actual amount that the enterprise makes.    

So what? What harm can come from uninformed speculation?

Quite a lot, in fact, for if people feel that their enterprise is already profitable enough (by their often-modest standards), then they are unlikely to feel motivated to put in the extra effort or to do the extra yards. "After all, we're doin' alright, aren't we?"

Even worse, if, in their unknowingness, they think that the enterprise is unacceptably profitable by their measure! That has the potential to introduce doubts for them about the ethics, fairness or social values of the enterprise, and it can seriously erode their motivation and performance.

How to Teach about Profit

By Rick Wallace

The first step is to get your team together and hand out a piece of paper and a pencil to each person. Ask them to write on that piece of paper the % of Net Profit - the profit we earn here before we pay taxes and interest to keep it simple.

Take up the papers and read them to the group - from my experience most everyone will be north of 30%.

Now show them the real number for your last 12 months. Let's say it is 10% and you sold $1 million dollars for the purposes of this exercise. Your cost of goods sold was 55%, your labor costs were 23%, your expenses were 12%.

Now hand out $1 in change to everyone in dimes, nickels and pennies that will allow you to match the up with the next step.

Tell them that that $1 represents our sales last year.

Then ask them to give you 55 cents back. Explain that is what it costs you to buy the things you sold. Cost of Good Sold.

Now ask them to hand you another 23 cents. That is for the salaries, benefits, etc. Your total cost of labor.

Now ask them for another 12 cents. This is for the heat, rent, supplies, etc. The operating expenses.

Now they have 10 cents left. Ask them to give you 4 cents back for taxes.

Now they have 6 cents left. Ask them to give you 3 cents for the new trucks and computers you bought last year.

Now ask then to give you 2 cents for the interest you pay on the line of credit.

They have 1 cent left - we have to put that in the bank to try and build up some money so we don't have to use the line of credit next month.

Of course your numbers and situation will be different but I think you get the drift. It is easy to do and you will see a much different attitude about the business from the team going forward.

Next step - begin to show them how what they do individually everyday effects the profit of the company.

 

All the best, 

Rick Wallace