Saturday, February 18, 2017

Define your profit

This is part ten of my presentation “Making money from the cloud”. You can find the full slides at:

https://doc.co/LyrxvF/qcihGm

and the previous parts are at:

We live in exponential times

Consider the following

Major Trends

Macro Trends

Software will eat the world

The phone is the desktop

Build a tailored service

Focus on adding value

The middle age spread

image

After taking the time to define a framework for our business let’s now examine each tier in detail.

We should always start with the top, and probably the most important tier, profit. I always like to ask people who run their own technology business why they do what they do. Surely, there is an easier way to make buck that selling technology?

The general responses I get back from this seemly innocuous question fall into three major categories:

1. I have no idea. This is where 75% of the respondents fall. They really can’t elucidate clearly any good reason why they get up every morning and do the same thing over and over, even if they hate it. They really can’t see any life beyond their business and typically their business is so ingrained in their personality that it is almost impossible to separate the two.

2. I want more. Here you find 20% of the remaining population. They say they want ‘more money’, ‘more time’, ‘more freedom’, etc. Yeah, great, I respond, but can you define for me what ‘more’ actually is? Is it $1 more or $1 million dollars more in profit? The failure here is to set specific goals. This allows people to ‘fool’ themselves into accomplishment by justifying results like $1 extra in profit as ‘more’.

3. I know exactly what I want. Here lies the final 5% who I would suggest are the most profitable and successful. Why? Because they know exactly what they want FROM their business. They want to take their family on a round the world tour for 12 months in 3 years, they want a pink Lamborghini, etc. The two major differences here are firstly, their goals are specific and measurable. Secondly, their goals are OUTSIDE their business. In short, they understand that their business is simply a vehicle to allow them achieve the goals. In short, in provides them freedom of choice.

Another fun question I ask technology business owners is how much money do you actually want to make? Few can put an actual dollar figure on what they want. You get a lot of general, fuzzy answers but few are specific down to the last cent. Why? Because again if you are fuzzy about the whole ‘what do you want’ then you lower the risk of failure. That’s honestly being slack now isn’t it? There is no shame in failure, it is a great learning exercise but people are very adverse to admitting failure, thus fuzzy goals.

By setting very specific goals you can create metrics that allow you to better understand how you are tracking to your goals. Having fuzzy goals means you have no concrete idea of what target you are shooting for. Thus, you have little idea what adjustments you need to make to achieve these. Again, an easy cop out using ill defined goals.

Another thing that I find many technology businesses ignorant of is, what is their end game? By this I mean what are their plans for the end of their involvement with their business? Are they going to close it down? Sell out? etc? What’s the plan? One of the most memorable presentations I ever attended after I refocused my business a number of years ago, was all about how you need to run your business like you are going to sell it at all times. Doing that gives you the flexibility to firstly take advantage of any opportunity that comes your way. Secondly, it gives you the security of knowing that if something untoward eventuates (say an illness, relationship breakdown, etc.) you are in a position to dispose of the business if needed.

Just because you are running your business like you are going to sell it doesn’t mean you HAVE to sell it at any point. It simply provides you the freedom to be in control of when and why you sell, rather than it being forced upon you.

Another key oversight I witness with many technology businesses owners is they don’t diversify their income streams. They put all their eggs in the managed services basket and start to really struggle when the market no longer favours that (as we are seeing today). The more diversified streams you have the less risk you have. That is a time honoured rule of investment that you should also follow in a business.

So what other income streams are open to a technology business? Thanks to the Internet, plenty. Selling something (products, services, etc) directly via a web site is an option for many. Developing knowledge products like eBooks and courses is another. Getting into consulting or face to face training is potentially another. Going into another market or business has never been easier. The list goes on and on. There is also so much education and support for creating new income streams in your business that there is no excuse. The only impediment is the willingness to do some hard work and invest some resources.

When it comes to money in a business, it is always about generating profit, not revenues. Profit is revenue MINUS expenses! If it costs you more than you bring in then that ain’t profit, that is going backwards. Don’t also overlook the fact that expenses could be the time time you invest in your business. If you think you are generating good revenues but spending almost every waking hour in your business constantly, that isn’t profit either. That typically happens when you have no definable goals outside your business as mentioned previously.

Every time you spend something in your business that is an expense. Immediately, you should be asking yourself, how is this expense going to generate my business more money? That is how am I going to recover the cost of this expense plus some extra (i.e. profit). Simply throwing money away in a business without thought, because you can, is folly and arrogance that will one day come back and bite you in the backside.

Profit therefore should be the MAJOR focus of your business. Profit is the mechanism that allows your business to fund your external goals. Thus, you should be looking to maximise this at every turn. The problem is that most technology businesses, as the framework has shown, has actually become the smallest piece of the pie overcome by inefficiencies and lack of focus. Most see it as the end result of everything else in a business rather than defining it up front and making everything accommodate and focus on that goal. The good news is that you can fix upside down priority. You can once again make profit the largest piece of the pie.

Stay tuned for how.