Why Profits Matter (Hint: It’s Not Just Dollars-and-Cents) - Erin Armstrong

Why Profits Matter (Hint: It’s Not Just Dollars-and-Cents)

by | May 24, 2024 | Leading Your Business, Money Mindset, Small Business

Before she became a client, one of my prospects told me she was thinking of shuttering her growing, high-end-service-focused business.

On the surface, this didn’t seem to make sense. The firm’s stellar reputation was drawing flocks of new customers from both the U.S. and abroad. Sales and revenue were skyrocketing. To handle the increased workload, she had to hire several employees. 

In short, her company exhibited all of the hallmarks of success that would make most entrepreneurs green with envy. 

But when I questioned her more closely, she confessed that she felt trapped. 

She was spending too much of her time micro-managing employees and redoing their work. She was taking on too many less-lucrative engagements that consumed far more effort than they deserved. She lamented the countless hours she was spending at the office instead of at home with her young children.

Even worse, increasing sales and revenue wasn’t translating into greater financial rewards. At the end of each month, she was barely meeting payroll. And her own income wasn’t anywhere near what she felt she deserved. 

I hear this a lot from small-business owners. They’ve been conditioned by the media, their peers, and their local Chamber of Commerce to believe that success is measured solely in terms of increasing market share, sales and revenue.

But, too often, owners don’t factor in the importance of profits.

And I’m not just talking about dollars-and-cents. 

Because, to quote that shopworn cliché, money doesn’t buy happiness. There are plenty of entrepreneurs who dislike running their business but love the profits they’re making. 

But I submit that owners don’t need to sacrifice their physical and mental health in the name of making money. 

That’s why, when I work with owners who feel trapped, I try to help them understand that there are really two kinds of profit that matter:

  1. Financial profits; and
  2. Work-life fulfillment profits. 

Let’s start with the second category, since it’s less obvious to many business owners.

Greater efficiency = a better work-life balance

Small businesses that are run efficiently usually benefit from greater productivity, reduced stress, and a better work-life balance for their owners. 

How do we define efficiency?

In the service sector, it’s about having the right personnel in place to get each assignment done right, on time, and with as little hand-holding as possible. 

It’s about keeping expenses under control, establishing workflows that track phases of a project, managing scope-screen risks and keeping a close eye on billable versus non-billable hours. 

It’s also about taking on the right kinds of assignments.

My client, for example, felt that she should never turn down a job, even those of the “low-hanging fruit” variety. 

This may be true for businesses struggling to make a name for themselves. But when a company reaches a certain level of success, owners can afford to turn down jobs that don’t pay as well, take more time to complete than they deserve, or don’t fully utilize the talents they and their employees bring to the table. 

I recommended all of these efficiency-enhancing strategies to my client. Some of these would require tough decisions. For example, she would need to get rid of several underperforming employees and pay more to replace them with people who had the skills and motivation to get every job done right and on time.I also recommended that we start conducting return-on-investment analysis on all proposed projects to determine which ones were worth accepting—and which should be rejected.

Boosting profits without risking burn-out

After all, one of the reasons they started their company was to benefit financially from the fruits of their labor. 

Some owners believe that they have to increase revenue to increase profits. But this isn’t necessarily true. Many of the entrepreneurs I work with boost profits by 100% or more without taking on more jobs, hiring more employees or working weekends and holidays.

As I mentioned, optimizing operational efficiency often results in larger profit margins because it reduces overhead.

Another way businesses can increase profits is by making sure their services are priced accordingly.

I know this from experience. Many owners who engage me as a Fractional CFO are recognized as being among the best in their industry. 

Yet, when I’m analyzing their financials I often find that they’re not charging enough for their services. They may do this because they’re not aware of what their competitors are charging. Or they fear that if they charge too much they won’t land new clients.

But when I conduct market research for these clients, I usually find that their competitors are charging much more, without necessarily delivering high-end service. 

It often takes a lot of gentle persuasion to convince my higher-end clients to raise their prices. But, once they start doing so in a well-conceived manner, they’re delighted to find out that their best clients don’t jump ship.

More importantly, new prospects don’t blink an eye at these prices, since they understand that they’re paying more to work with one of the best in the business. 

In fact, I’ve often found that right-pricing services alone can increase a firm’s profit margins significantly without requiring them to take on additional work. There are other ways that businesses can increase profits, such as adopting a more tax-efficient corporate structure or maximizing business tax deductions. The good thing about these kinds of strategies is that they don’t require owners to radically transform their business model to reap higher profits.

Improving my client’s dual profit centers

Because she no longer needed to hand-hold her employees and could be more selective about the assignments she took on, she found that her workload—and her stress level—were significantly reduced. 

She was able to spend more time with her children and take more time off. And because she was only accepting the most lucrative jobs, and pricing them accordingly, she was able to increase net profits and her own net income by more than 100% in less than a year. In short, she met both her monetary and work-life profit objectives without having to take on more business than she could handle.

Adopting a profit-focused mentality

When entrepreneurs focus their efforts on increasing profits—both monetary and personal—they can avoid giving in to the “grow at any cost” mentality that pervades the business world. Once their business is running at peak efficiency and they’re making enough money to live the way they want to without sacrificing their quality of life, they can define what success means—on their own terms.

Wishing you fulfillment & financial success,

Erin Armstrong

Erin Armstrong is a Business Advisor, Chief Financial Officer, Tax Strategist and licensed Enrolled Agent who’s on a mission to financially empower business owners. Her unique, comprehensive approach integrates all the financial aspects of your business (such as accounting practices, tax strategy, profitability, budgeting, & cash flow) with an emphasis on developing a positive money mindset so you can move forward in a confident, proactive and empowered way. Find out more about Erin here.

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