What is your goal when it comes to profits for your business? Is it to maximize profits? Is it to make as much as you reasonably and ethically can make while delivering the most advantageous products and services to your customer?
The fact is, aiming to make the “maximum” is exactly the opposite of what you need to be aiming for. Asking what your human, physical and financial resource requirements are in order for you to grow enough to secure your future and vision is the wrong question. The right question to ask is something completely different. The right question to ask is:
“What is the minimum we must make in order to achieve all of the above objectives and sustain the necessary growth our organization requires to realize our vision?”
That’s right, the minimum. The fact is that the minimum “profit requirements” may be more than what you current “maximum” target may be.
Another fact about “profit” is that there is no such thing; there are only costs. A problem that we have in society today is that both the non-business and business sectors have a delusional view about this thing we call profit. But we can’t blame government or the public for this delusion; we must blame business leadership/ourselves for not making this clear both to our teams and to the public.
We must make clear that there are no profits, but only costs, and we must understand what those three types of costs are.
First, there are the factors of production, i.e., the necessary resources to produce and deliver: i.e. labor, physical resources and capital. When you have properly conducted your strategic thinking and visioning for the business, and you have thought about what the optimistic potentials for growth may be as well as the most likely potentials for growth, you can immediately begin planning for likely resource requirements for sustaining such paths of growth. You must list out your growing human resource requirements, potential new physical resource requirements and their costs and perhaps even the cost of capital. When all of these required costs are tallied, only then can you begin to determine what today’s profit requirements are so that you may be competitive in the future.
Second, there is the cost of future jobs and pensions. Business earnings whether they are kept inside the business or paid out into the capital market are the key source or fuel for future jobs and the largest source for future pensions.
Third, profits are needed to compensate for future risks and uncertainty. No leader can predict the future. The odds are always in favor of some loss or adverse condition in the future; therefore, it is critical to withhold profits for the inevitable future losses, costs and changes, which are risks and uncertainties that no one can predict.
The above thinking is necessary for any strategy and implementation process. If you have recently completed a planning process and didn’t determine future resource requirements and thus the minimum profit requirements to maintain an optimal growth trajectory, then you didn’t really complete the first steps of the strategic thinking process.
What is fascinating is to watch how much faster companies grow when they’ve adequately planned for future resource requirements and when they have repositioned the perception of profit both at the leadership level and throughout the team. This inevitably leads to great improvements in innovation and new profit.
Your first responsibility is to make enough profit to cover the costs of your business’ future, if you don’t, then there is no future for your business nor for all that it may be able to offer to your community and society.