Profits are Important & Everyone Should Understand Why
The most important line of a Profit & Loss Statement is the bottom line: profit. It’s safe to say that every employer, employee, and customer can understand why profit is the most important measure of a business because without profit, the company cannot stay in business. This is a simple concept.
However, beyond earning enough to stay open, why does it matter how much of a profit we turn? Is it simply so that the owners and investors can reap as much as possible? If maximizing returns is the only reason that you care about profitability, then you will have a very hard time convincing your other stakeholders that they too should care about profitability.
And remember, the more people that are invested in your business’ success, the more you will achieve.
So why do profits matter? Let’s talk about the most obvious first; yes, stakeholders should get a return. But we need to help our teams understand why this is true. Providing returns to owners and investors is not about getting rich, greed has nothing to do with it. A business is an investment and the goal of all investments are to generate returns. If your business isn’t generating a return, or isn’t’ generating a return that is greater than that which can be found elsewhere, no one will invest in it including the owners. And if no one is willing to invest time and money in the business then it will not exist or will not grow. So generating a return, and a sizable return at that, is what allows a business to continue to exist and to continue to grow.
The second reason that profits, and growth, matter is that returns to owners and investors aren’t the only places that profits go. In most businesses, profits are first invested back into the business for capital expenditures. Without profits, any item that isn’t on the P&L can’t be invested in without some sort of external financing. But, as we said above, without being profitable most food businesses will struggle to attract investors. So a business cannot continue to grow, or even to keep up with regular on-going maintenance, without the ability to attract investors and therefore without generating a solid return.
In this example profitability matters for 2 reasons: it allows us to invest back into the business's assets and it indicates to investors that the business generates good returns and therefore is a good investment opportunity.
Profits are also offered as distributions to employees. Bonuses and profit sharing are the most straight-forward programs used to disburse profits to employees, and I highly recommend some form of both. These programs can go a long way in incentivizing and motivating your team and furthermore they serve to share the product of hard work with the people who put the work in. Returning a portion of profits to employees is both good business strategy and fair. These programs aren’t the only ways that profits flow down to your team; a company can only increase the amount it spends on labor if it has the money (profits) to do so. That means that promotions, raises, and higher starting wages are all made possible by higher profits.
As owners and managers we may intuitively understand why profitability matters and why increasing profitability is a worthwhile goal, but it’s important for our teams to understand this as well. Getting buy-in from all levels will help you increase your profits and reach your goals.