Businesses the world over make money, but only a percentage of those that are generating decent revenues end up making profit. Why is this so? What are the things that force even those that have stable sources of revenue, and decent growth to go under?
Businesses face challenges, that much is given. There isn’t a business out there that doesn’t have flaws or issues. What separates the good from the bad is what you call efficient management. Those that are good enough to realise issues and do something about them, prosper, and those that don’t, suffer.
Research states that 80% or so of businesses struggle. They’re check-by-check, never making a profit, going out of business because of cash flow. The issue with most of these is the standardized accounting principle known as GAAP Accounting.
All large businesses are mandated by law to use this. Small businesses electively can follow. Ninety-nine-percent of small businesses use GAAP Accounting and the foundational formula is this: Sales – Expenses = Profit. But here’s the absurdity of it. Profit is a leftover in that formula. It’s the afterthought that matters.
Businesses sell as much as they can. They spend money to keep the sales cycle going. And then the last thought at the end of the month or the year for them is to know what was left over. So the problem in essence is in the formula itself. While logically it makes sense, it doesn’t fit into natural behaviour.
The natural behaviour of a person is to look at his/her bank account every single day and according to what he/she sees, use it up to pay for whatever bills and invoices that have been piled up. If there’s a little extra cash leftover, they think about investing or savings. In more cases than not, there’s no money left over, and then panic ensues and people start making collection calls and selling stuff. So in essence, people are in business to pay expenses. So the solution is to flip the formula, so that it becomes:
Sales – Profit = Expenses.
Logically it’s the same as the GAAP formula, but behaviourally, it’s completely different. Now what happens is that a sale is made, money goes into the account, the same behavioural pattern of checking the account everyday happens, but first, the profit-10%, 15-20% is extracted, reserved and tucked away so that it’s inaccessible. The remainder is left over to pay for whatever expenses that hasn’t been paid for yet.