Math wasn’t my favorite subject in school. I was OK through fifth grade, but then Algebra got tricky, and it was downhill from there. I was all honors in other subjects, but math just didn’t click in my brain.
How did X and Y (letters by the way- not numbers!) describe lines, curves, upside-down curves, and all kinds of other weirdness despite being the same letters in each case? This just didn’t penetrate my skull very well.
Luckily, my passion was always entrepreneurship and business and the math for this stops in the second or third grade- an area I was just fine with. The math for business is mostly adding and subtracting and comparisons- is one thing bigger or the other?
So, when I hear people say they don’t like numbers or they aren’t a numbers person, I get it- I’m not either! But then the numbers of business aren’t the ones you’re probably thinking of- ie wherever you left off of math in school- which I guarantee wasn’t third grade. But the numbers of business are really, really important to your overall success and I want to make it simple for you.
The number one most important number in business is your profit. This is how much the business makes from its income after deducting the expenses. If this number isn’t positive, then you’re burning through savings, investments or loans or some combination of those to keep going.
Check out what else we’ve been up to!
- Matt Reviews: What is The Pareto Rule, AKA the 80/20 Rule? (Short Video)
- Matt Reviews: How to Delegate to Scale Your Business (Short Video)
- Matt Reviews: Is Being Dictatorial Helping or Hurting Your Business? (Short Video)
- Business for Sale, Would I Buy It? | Profitable Kids Educational Mobile App (Short Video)
- Elevate Your Amazon Business for Profitability | Matt Remuzzi (Podcast)
This is a finite number! If your business is profitable, you can keep going indefinitely (well, there is cash flow to consider too, but for the sake of this discussion, I’m keeping it simple for now) but if it isn’t then the amount of time before you run out of money is measurable but short.
Therefore, the most important thing in business is to make sure you are profitable as quickly as possible and that you stay profitable always or as near to that as you can.
Which means, as a business owner, you really should understand your profit number at all times and more than that, understand what makes you profitable and how to increase that number. Is there such a thing as “too much profit”? Not really, no.
You don’t want to sacrifice quality or growth in the long term just to max out profit right this minute, because that will give you overall less total profit even if you make more right now. But on the whole, you want the business to generate as much profit as it can to help fuel further growth, insulate you against competition or downturns in the economy and as an indicator that the business is running as efficiently as it should.
So now that we have the purpose of profit laid out and have identified that this is not scary math to work on, let’s talk about increasing it!
How to Increase Profit in Your Business
Let’s say you want to grow your profit by 20% and your revenue is $100 and your expenses are $75, meaning your current profit is $25.
First, if 20% more is the goal, we just multiply our current profit by 1.2 (for 120% or a 20% increase over what we currently have) and get $30.
This means, if we raised prices by 5% and changed nothing else, we’d be there: $105 in revenue, minus $75 in expenses means we now have $30 in profit- a 20% increase!
Or, if we can cut the expenses by $5, we get to the same place ($100-$70 = $30).
Another option is to grow the business by enough to make another $5 in profit. If we make $1 in profit for every $4 in sales (which is our current 25% profit margin) then we need to increase sales by 4 times the profit we want to add. In this case, 4 x 5 = 20, so if we get to $120 in sales, then 25% of that is $30, or a 20% increase in the profits over what we had before.
As you can see, the math is pretty simple and nothing past what you could do in third or fourth grade.
In real life, you’d probably want to adjust all these things to get the best results and aim to increase well beyond a 20% bump in profits: raise prices, increase sales and cut costs.
How do you do this? Raising prices and selling more come from the same general place- have a business that offers something that people value enough to pay more for and tell people about and seek out over other options.
Successful businesses that can charge more of a premium price and continue to grow are generally leaders in their categories and make it easy for customers to pick them over the competition. This is where you want your business to be.
Cutting costs is more about continuously reviewing your operations, vendors, customers, and staff to look for ways to do more with less without sacrificing anything that makes your business successful in the first place.
All of this together ensures your business is as profitable as possible, which is the state of being you want to exist in. So, do the (simple) math to see where you’re at and then make a plan to improve and track your progress. It’s not any harder than it was to get started in the first place and it’s the best thing you can do for your business.
If you aren’t sure how to get there, or even where to start, let me know! I’m happy to help.