Running a business without a profitability plan is like driving without a license -- not very smart. The number one purpose of starting a business is to make money.
...Okay, I see that look you’re giving me. “Yes, of course,” you’re thinking. “Isn ‘t that obvious?”
Perhaps. But over the course of more than two decades as a business journalist and small business expert, I’ve discovered something even more painfully obvious: Each year there are many entrepreneurs who start businesses with no real plan for actually making money.
Some have been pushed into entrepreneurship as the income source of last resort after being laid off or enduring unemployment for much longer than anticipated. In their desperation to get something -- anything -- going, they’ve started their business with a kind of ready-fire-aim mentality: generating income is the number one priority, figuring out a plan for profitability can wait. Often, the entrepreneur gets so caught up in the demands of daily operations that they never quite get around to figuring out whether they are actually making money or not -- or even if they can -- until it’s too late.
Others are so in love with their business idea, product or service that they assume that making money will be a natural result of their passion, hard work and positive thinking. Often, these are the same would-be entrepreneurs who gleefully state that their product or service is so special that they have no competition. They also assume that their revenue will grow exponentially while their costs will stay flat or even decline. To them, the test of profitability represents the pin that could burst their bubble -- a reality check. Who needs it?
And believe it or not, some entrepreneurs are morally ambivalent or even repulsed by the idea of being motivated by anything as base as profits. They think, “Of course our business will make money. But I don’t want you to think that I am so focused on it as to plan to make that happen. What kind of person do you think I am?” This line of thinking is particularly common among new entrepreneurs from disadvantaged backgrounds, who see entrepreneurship as a way to create jobs, uplift communities, provide our youth with positive role models, etc.
I see this each year as a national judge for the MillerCoors Urban Enterprise Series Business Plan Competition, which has for more than a decade invited mostly black and Latino entrepreneurs from America’s urban areas to compete for as much as $150,000 in grants for their businesses. Each year, at least a couple of the plans sound more like they’re for charitable or civil rights organizations, not for-profit enterprises, emphasizing “giving back to the community” without bothering to make the case that the business will generate enough revenue to even sustain its own operations, much less deliver a return on investment. It’s great to want to “give back,” as long as you recognize that if your business is not profitable, you won’t have anything to give. A business has to make money if it is to make a difference.
Whether you are still writing your business plan or your business is already up and running, there should never be a time when you cannot explain exactly how your business turns a profit. Running a business without a clear and easily understood business concept or profitability plan is like driving a car without a license -- it’s doable, but unnecessarily risky and not very smart. In fact, I quite literally think of the profitability plan as a license to make money.
Are you guilty of driving without a license? Only you know for sure. But here are a few signs:
You let yourself be pushed around on price.
This is a sign that you haven't locked down on the value of what you are offering to the marketplace. If your solution to every problem is to lower your prices, in hopes that customers will come running to you, you’ll find yourself sadly mistaken. Many consumers will happily allow you to sell your goods and services at a loss. More will assume that your wares are of a lesser quality than that of your competitors, and in time they’ll be right: As your business becomes cash-starved, thanks to you literally giving away the store, the quality of your offerings will inevitably suffer. Your competitors will happily lower their prices too, knowing they are in a better position than you are to lose money on sales. After all, they can always raise their prices to make up for their losses after you’ve been forced out of business.
Entrepreneurs without a profitability plan have no idea what to charge for their goods and services. It’s your job to know what your goods and services are worth, what it costs you to provide those services, what your competition is charging, how much money you have to make on each unit sold to break even and how much higher than the break-even amount you can charge customers to get your profit. Once you’ve locked in on that information, set your prices accordingly and stick to them.
You’ve started a “social enterprise” -- minus the enterprise.
The operative word here is “enterprise.” The fact that the revenue and operations of your businesses are earmarked to achieve a social objective (i.e. job creation, environmental sustainability, education reform, etc.) does not change the fact that this is a business which must be designed to make money. It is the profits from the enterprise that must finance the servicing of the social mission. If you are not prepared to come up with a profit-making plan for your social enterprise, you’ll do better to just take the capital you plan to invest toward the venture and use it as a donation to a charitable organization that shares your cause.
You give freebies to your family and friends.
There’s a term for this in African American communities: “the hook-up.” As a new entrepreneur, you will be tested by people who won’t take you seriously at first. Some will point to your lack of experience as a business owner. Others -- particularly family and friends -- will try to trade on their relationship: “You’re not really going to charge me, are you?” Bottom line: you can’t make money if you give your products and services away for free.
Offering a voucher for one free meal after a customer has purchased 10 meals from your restaurant makes sense because it provides an incentive for people to pay to eat at your establishment more often. Hooking people up with free meals in hopes that it will inspire customer loyalty does not. Don’t offer “hook-ups” without a clear rationale for how they will drive sales. Without a clear profit-making plan, you won’t find that rationale, and you’ll be easy pickings for family, friends and others who will only take you as seriously as you take yourself as a business owner.
You approach money-making as a happy accident.
You have a beautifully organized and professional looking business plan document. Unfortunately, it’s missing a clear explanation for how the business plans to make money. If you’re answer to the question, “How do you turn a buck?” is a series of errs, uhms and ahhs, or a bunch of convoluted jargon, your business concept is muddled.
A business plan without a money-making plan is like a race-car without an engine -- it might look fast, but it won’t take you anywhere but downhill. If you can’t explain in just few sentences exactly how your business makes money, chances are you’re not making any, or won’t be for long. This is why having an elevator pitch for your business is so important -- not only in case you run into Warren Buffett or Michael Lee Chin on the way to the 50th floor, but so that you are crystal clear in your own head about your money-making premise.
It’s hard enough to make money when you are trying your hardest -- facing tough competitors, fickle consumers and an unsympathetic economy. Can it be done without really trying? It’s possible, but not likely and not for long. Better to adopt the attitude that your number one job as an entrepreneur is to make money -- ethically and responsibly, but absolutely and unapologetically as well. To achieve sustained entrepreneurial success, profitability cannot be an optional exercise.