Why Profit Matters, and Where it Comes From

In most industries, sales are difficult. Every new customer and project is a victory. The revenue from those customers propels the company forward, but after the costs of selling and delivery are factored in, the profit that remains may be disappointingly small.

That’s not to say that generating moRevenue Up, Profit Flatney is the end goal of business; it is not. Generating profit is no more the purpose of a business than floating is the purpose of a boat. A boat is designed to GO somewhere; and a company is intended to DO something. But a boat that takes on water cannot go, and a company without profits cannot do – at least it can’t do very much. So company leaders may pursue profit as a goal in itself, but the greater purpose of profit is to allow further reach and greater impact.

 

Seeking greater profits, most companies look to growth: obtaining more customers and greater sales. Growth is good, but selling more usually results in more costs. Sometimes those costs increase in step so that even when revenue grows, the remaining profit at the end of the day is not any greater. Depending on the business model and payment terms, growth can consume cash, presenting management challenges and borrowing costs.

Smart companies understand that reducing costs has a greater impact on profits than increasing revenues. Lower expenses immediately impact profit, even when revenue remains the same.

Consider your business. For every hundred dollars of new sales, what portion translates to profit? Depending upon your industry and the type of revenue, one hundred dollars of new revenue might mean five, ten, or even twenty dollars of profit.

Cost down, Profit Up
In contrast, what happens when you uncover one hundred dollars of savings? That answer is the same in every business: every single penny goes directly to the bottom line. That money can be captured as profits or directed elsewhere to further the company’s mission.

 

 

 

 

 

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