For too many business people, increasing business profitability is a primary objective. So, a common question for them is to ask someone how to increase business profit. As we talk about this subject over the next several minutes we will also explore if that is actually a good question or issue to be concerned with at all.
In its simplest form there are only three parts to a business income statement.
Those three parts are revenue, expenses and profits. The calculation most commonly used is revenues minus expenses equals profits. Looking at business in this way, increasing profits is a simple thing to do.
Either increase revenues or decrease expenses.
The vast majority of business owners have relatively small businesses. Increasing profits may not be what these individuals should be doing. That’s because in general, the higher the profits the higher the taxes that will need to be paid.
However there is an entirely other group of business owners. These are the stockholders in public companies. Executives in these public companies most definitely are asking how to to increase business profit and they are managing their business to do just that. That’s because there’s quite a lot of pressure on them by several groups of stakeholders (shareholders, analysts, the press and various others) to do just that.
This group of business executives (those in charge of public companies) are concerned with such things as profits and shareholder value; market capitalization; and the price of their common stock. All of these items are relatively short-term in focus. Is because in general public companies are evaluated over the short term. Typically this is on a quarterly basis if not more frequently.
In general, private business owners should not be concerned about almost anything a public corporation executive is concerned with.
Private companies and their owners generally have a much longer viewpoint. In conjunction with that longer viewpoint, any concern about profitability should be minimal. Owners of private companies, often family enterprises, tend to be much more emotionally committed to their businesses. Their horizon is a much longer-term and may span several generations. These owners are not concerned about making their numbers over the short-haul. Instead they are attempting to build a company of value while at the same time producing sufficient income to support the lifestyles of themselves and their family members.
So for private companies and their owners the questions that should be asked versus how to increase business profit might include some of the following.
- Since my personal compensation is an expense, should I maximize my person income or the profits of the company?
- Should I own the building used by the business and charge high rent? Or, should the business rent from a third party?
- Should I hire a family member or should I hire someone from outside my family?
The best path is to understand the overall picture first, then ask questions that fit.