Profit or Wealth?
Originally published: 12.01.19 by Ruth King
Many contractors focus solely on profits. They look at their profit and loss statement and guide their business based on what that statement says. That’s only a part of the longevity equation.
Looking at a balance sheet is more important than looking at a profit and loss statement. You build longevity (i.e. wealth), by building a strong balance sheet. From a business perspective, you cannot build wealth without profits.
Profits, a profit and loss item, are turned into cash, a balance sheet item. Both are required for business survival.
But, are you building weath? It’s great to have profits year after year, but if you are not building wealth in your business, are the profits really enough?
An example from outside our industry:
Restaurant Owner No. 1 had a great weekend. The restaurant revenues were amongst the highest they had ever had. The restaurant owner was thrilled with the profitable weekend.
Unfortunately, the restaurant owner didn’t really know who was dining in the restaurant. He did not get the names of the diners, birthday dates or other pertinent information to turn those diners into clients.
He hoped that he would have another busy, profitable weekend.
Restaurant Owner No. 2 also had a great weekend. The restaurant revenues were amongst the highest they had ever had. They added 15 new diners to their frequent diner program. Servers asked for, and received, these diners’ names, birthdays, anniversaries and a physical and an email address to contact them.
These 15 new diners could be sent emails and postcards which gave them a reason to return to the restaurant. These communications were special invitations to come back and included a free desert or a free entrée on their anniversaries or birthdays.
This restaurant owner knew that he would have busy times again. He knew his customers. He sent them marketing messages giving them a reason to return. And, from experience, he knew that a percentage would return bringing potential new restaurant diners.
Which of these two restaurant owners really had a great weekend? The second. He built profit AND wealth.
Now, the stories of two contractors:
The two contractors were located in different cities. They were similar in size, each generating more than $5 million dollars in revenues. Each contractor had 10 profitable years. The first contractor was thrilled with his profits over the 10 years. He saved his money and built his maintenance base. He grew maintenance clients and cash.
The second contractor was thrilled with his profits over the 10 years. He relied on the great economic times and didn’t focus on building his maintenance base. In addition, those 10 profitable years gave him great vacations, great second homes and other “big boy toys.” He turned the profits into cash and spent the cash. He didn’t save any money.
The economy tanked. The first contractor, who had built the wealth (i.e. maintenance base and cash savings), survived the downturn. It was a rough two years. The company had to cut costs and use some of the cash they had saved to survive. Most of the maintenance clients stayed clients. They repaired rather than replaced equipment during the poor economic times.
The second contractor also had a rough two years. The company didn’t have the maintenance base to survive, nor did it have the cash to survive the two years. The company filed for bankruptcy at the end of the first year and went out of business, even though they had been a company with more than $5 million in revenues. The company didn’t have the wealth to survive the downturn.
Perhaps a great year should be defined not only in profits, but in how many new maintenance customers you added and retained. Maintenance customers are your future wealth and future profits. The more maintenance customers you have and retain, the wealthier your company is.
There are always economic ups and downs. Building profits and wealth is critical for survival. They are also critical to achieve your end game — whether it is to sell the business, turn it over to employees, or keep running it forever. Over the past 10 months I have written about the laws of profit. Over the next 10 months I will give you the laws of wealth. Implement both in your business to survive.