Wednesday, June 29, 2011

How to Make a Profit

The purpose of business is to make a profit, right?  If your income exceeds your expenses then you are making a profit.  Simple, but not always easy.  

Simple because everyone understands the concept:  acquire or do something that costs $1 and sell or provide it for $5 and you've made a profit.

Not always easy, however, because of what is often entailed in acquiring something then turning around and selling it.  i.e. control fixed expenses (overhead), make sales.  

Now, there is a wide variety of business models out there, but in very general terms the two common types these days are "brick-and-mortar" (B & M), that is, a physical presence (store, office, etc.) and online businesses, requiring no physical location.   I suppose home-based businesses could also be included in the non-B & M, depending on how business is conducted.  The variables are infinite, but basically it boils down to store/office or no store/office.

And so with a B & M business, fixed expenses can include but are certainly not limited to things such as rent, utilities, equipment payments, insurance, etc. - money spent whether you make a sale or not.

Making sales, a part of operating expenses, requires spending money as well, but hopefully this is where you start to see some Return On Investment (ROI):  spend $1 on marketing, receive $5 in sales as a direct result.  

Alas, a lot of small business owners get frustrated with this unnecessarily.  They spend money on advertising because the ad rep convinced them it will help "create a presence in the market", and then see no measurable results.

And so a question arises:  Should marketing be included in fixed expenses or operating expenses? (please keep in mind, I'm not an accountant,so I use these terms loosely to make a point, for example, a fixed expense is the car payment, an operating expense is the gas). Similarly, a yellow page ad is a fixed expense, a newspaper display ad is an operating expense.

I guess it depends on your budget, but since this blog was created for small businesses, I will assume you don't have a huge budget for image-building advertising, but rather, you need results from every dollar spent on marketing, and so, marketing for you is an operating expense.
Obviously, expenses are affected greatly by which of the two type of businesses conducted, but interestingly, marketing efforts can be very similar.  After all, it doesn't really matter where you send your customers, a store or a website, as long as they come. Increasingly, though, more and more people are using the internet to purchase what they used to get at the store.  But the internet is not a business, it is merely a means to make your business known, or a place to conduct business.  But it is the most popular nowadays, therefore the most effective method available to you.

It gets down to this:  whichever type of business you're in, do everything in your power to keep overhead to a minimum.  And  make sure your operating expenses produce measurable results (which means you'll have to actually measure or track, duh!), especially in the area of marketing where you really can implement strategies that give you good ROI.  (Please look at my 90-second video on the importance of marketing here)

For Your Success,

Forrest Brandt

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