A Non Obvious Killer Benefit To Keeping Profit Margins High

There are lots of reasons that having a more profitable business is better than having one that operates on low margins or even razor-thin ones.

The first, of course, is that you just make more money for each dollar in sales you add. Like I said, pretty freakin’ obvious.

The follow on benefits to that are also pretty clear. For one, you can much more easily weather the ups and downs that go with any business and are just part of being self-employed.

The ones you can see, like seasonality and competition; and the ones that are much harder to see coming, like massive tariff spikes and trade wars. If you have room to adjust for your cost of products, to offer discounts and invest in more marketing, you can feel much more confident on getting through to the other side of a downswing and get back to the upswing.

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If you decide to compete on price and try to make it work with volume, you are much more susceptible to running out of cash when trouble hits.

Some businesses start out with high margins but end up going low anyway. A business that sells products directly to consumers but then gets an offer to be in stores will have to make this decision.

Becoming a wholesale seller means accepting a lower profit margin on each product, and most people understand that. What they may not factor in is it often also means waiting much longer to get paid, losing a portion of what you should be paid to reserves and hold backs, and having to make good on refunds and returns you may not get a chance to resell like you normally would have when you sold direct. The decision to go from a high margin lower volume business to a high volume low margin business has killed more than one otherwise promising enterprise.

None of these issues, however, is the topic I am thinking of in this case. The lack of ability to have much of a cushion, invest in growth, have room for discounts or promos or the regular worry of the balance between having bills to pay and getting paid are all headaches but still not the only ones to worry about!

 

The Top Benefit of a High Profit Business

The one I am thinking of is having the ability to recruit and retain the very best people. When margins are tight, there is a tendency to judge everything by its cost rather than its value. This includes the people you hire. If money is tight, you’re naturally going to gravitate toward paying people as little as you can get away with to preserve capital for all the other demands of the business.

This is a problem for several reasons. If you are offering low pay you are going to have a hard time getting the best people to start. But then even when you do find yourself with good people, or people who you’ve invested time and training into so they are really beneficial to the business, you may still find yourself losing them when they get better opportunities elsewhere that pay more, offer better benefits or more promotion options. If you aren’t able to afford to hire and keep the best people your business simply isn’t going to run as well as one that can.

Having better margins in your business means you can spend more on the team which in turn allows the business to perform better and so continue to grow and prosper. It's arguably the single most important investment you can make and a difficult, if not impossible, thing to do when you simply don’t have the funds to afford it.

So, if your business is not as profitable as you’d like, there is now one more reason to work on getting it there so you can build the dream team.

The people are the business. I don’t care what business you are in, as soon as it gets bigger than the founder, then the only way it reaches its full potential is to have the very best people working there.

If you don’t, or can’t, make that happen then in my opinion you’ve already taken a pretty significant hit to your ability to have the best business you could.

It’s not exactly a chicken and egg issue, because hiring comes first. But I think you can definitely say that with better people comes more profits and then with more profits you can get (and keep) better people.

Therefore, if your profits aren’t as good as they could be, work on that first! If you need help, let me know.