Every business conversation eventually gravitates toward one pivotal subject: profit. It's a term we frequently discuss in our work with businesses, and we believe there's a need for clarity. What exactly are we referring to when we mention profit? And why is it so crucial for a business?

Profit: The Lifeline of a Business

To draw a biological analogy, profit is like the oxygen we breathe. Just as humans cannot survive without oxygen, a business cannot thrive or even exist without profit. Without this lifeline, businesses risk fading into oblivion.

Defining Profit

Often, people mistake EBITDA (earnings before interest, taxes, depreciation, and amortization) as profit. This is a misconception. For numerous businesses, elements like depreciation are real costs that extract cash from the business.

Our stance? When we speak of profit, we're specifically talking about pre-tax profit. It encompasses all costs, excluding taxes. If there's no clear strategy for profit, businesses might face unfortunate futures. They could vanish due to lack of funds, get compelled to raise capital, or might even accrue more debt, intensifying the interest cost. None of these scenarios bode well for a business's longevity.

Grasping Profitability Standards

Let's delve into our yardstick for profitability:

1. Life Support (5% or Less Pre-tax Profit): If a business's pre-tax profit hovers around 5% or less, it's essentially on life support. Once you factor in distributions for taxes, very little remains for reinvesting in the business. It's a precarious position to be in.

2. Break Even (10% Pre-tax Profit): We consider a business to be breaking even at 10% pre-tax profit. This allows for tax distributions and ensures there's a substantial amount left for reinvestment, be it for working capital or capital expenditures.

3. Exemplary Business (15% or More Pre-tax Profit): A truly remarkable business operates at 15% or more in pre-tax profit. If you can consistently maintain this level of profitability, it's a significant achievement. However, keep in mind that persistent high profits might invite competition, which could eventually apply pricing pressures. In its relentless pursuit of equilibrium, the market will always challenge outliers.

The Final Take

In its purest form, profit is the amount remaining at the year's end before accounting for taxes. A steadfast rule of thumb? Aim for a minimum of 10% to ensure your business has the essential "oxygen" for reinvestment and growth. Remember, understanding and maintaining profitability isn't just about staying afloat; it's about ensuring your business's long-term vitality and success.