Profit First

There are millions of businesses around the world, from corner stores to huge tech companies. And there’s one thing their owners all want – to make a profit. Luckily, there’s an age-old formula to do just that. Sell as much as you can, subtract your expenses, and the rest is yours. 

A straightforward route to success, right? Not quite. 

A survey conducted from 2013 to 2015 by the Global Entrepreneurship Monitor showed eight out of ten businesses folding, with a lack of profits being the main reason. How does this happen when there’s a formula? The problem is the formula itself.

The key message here is: The traditional approach to profit rarely works because it goes against our natural instincts.

The formula sets businesses up to fail in several ways. First, it triggers our natural tendency to use up whatever is available. 

This was discovered in the 1950s when historian and author Cyril Northcote Parkinson came up with Parkinson’s Law, which states that the amount of work required to complete a task increases in proportion to the amount of time available. For example, if someone has to complete a report in two days, they’ll spend two days doing it. Give them a week for the same report and that’s how long they’ll take.

Swap time for money and the same thing happens in business. Entrepreneurs will find ways to spend whatever money is available and eat into their profits as a result.

There’s another way the formula keeps profits out of reach, and it’s through something called the Primacy Effect. This is people’s inclination to focus on whatever they see first and ignore the rest. If you’re shown a list of words, for example, you’re more likely to remember the words at the top. And since the formula starts with sales and ends with profit, entrepreneurs pump effort and resources into making more sales, believing this will automatically lead to profits.

But as you’ve just learned, profits are elusive. So, here’s the million-dollar question: how can entrepreneurs guarantee themselves a profit? 

The trick is to rework the formula. Instead of subtracting expenses from sales, determine what your profits should be and then subtract them from your sales. So, if your goal is a 5 percent profit, subtract this before you’ve had a chance to spend it. No matter how much or how little money remains, your natural ability to work with what you have will kick in. 

Rethinking the formula is a key step in making your business profitable, but it’s just that, a step. In the following blinks, we’ll delve into the rest of the strategy.