As a business owner, you must make a profit to stay in business! If you’re running a family-owned and operated business, you know this all too well because the profitability of your business affects your immediate family, if not your extended family. But what makes a business profitable? At its roots, it means a company has financial gains after all of its expenses are paid.
In a family business, profit is very personal. It means money for dance classes and soccer, college educations and retirement. Profit means leaving a legacy that can be passed down to the ones near and dear to your heart. Additionally, it can mean an annual vacation with your family, state-of-the-art machines or equipment (depending on the industry), new computers, a bigger office space, or annual Christmas bonuses for employees. Profit is so important, its abundance or lack thereof can affect virtually every aspect of the family business owner’s personal and professional life.
For those who thrive off the thrill of profit and accumulated wealth, they can have a strong drive to maximize the company’s profits to support growing company and lifestyle demands. And for business owners seeking work and life balance companywide, they may wish to provide flexible schedules and a family-friendly work environment; therefore, there’s an extra incentive to keep profits high and employees happy.
Interestingly, open-book management can impact profitability by shifting the employees’ view on the “perks” of employment. For example, before implementing the likes of electric sit-stand desks, paid daily lunches, free coffee and soda, and generous bonuses, the employees from the top to the bottom will ask, “How much will this added expense reduce profitability?”
Stakeholders View Profitability Differently
Depending on the stakeholder, their points of view on profitability vary and this is what our business coaches have learned:
Business Owners see profit as a means to an end. It provides the capital needed to reach their short- and long-term goals as the company’s visionary catalyst. Owners see profit as the way to cash in on their investment when the time is ripe for an exit. In contrast, a lack of profit can be personally threatening, especially when owners put up their personal residence as collateral for a business loan, or when their retirement and legacy rely on the success of the business.
Managing Employees see profit as the vehicle to buy better tools, hire more staff, get a larger building, and improve their personal lifestyles (raises, salaries, bonuses, and promotions). If the employees lack information about the costs of running the business, they can be too disconnected and fail to understand the owner’s need to see a return on their investments.
Family members want the ability to rely on the business for income. They want to know what they can expect in regards to profit being used for distributions or dividends. If they feel slighted, they may think they are receiving less profits because of their place in the family hierarchy. It’s not uncommon for family members to judge each other on how the distributions from profit are being utilized.
Suppliers want to be assured that a company is making a profit so they will be able to pay for supplies. If a supplier questions a company’s profitability, they may impose tougher terms on the company.
Customers want the best quality product for the price. If they can get something cheaper elsewhere, they will. If they feel a company is making too much of a profit off their business, they may feel as if they’re being taken advantage of.
Measuring Profitability in Family Firms
A critical key to viability in family firms is to measure profits in such a way that fosters stakeholder comprehension. The process is rather straightforward: take the revenue, minus the expenses and you have the profit. However, there are nuances in family businesses that must be factored into the equation, such as:
- The family members’ compensation.
- The family members’ benefits.
- The related transactions made with other businesses owned by the family, and with other members of the family.
- The charitable or philanthropic donations made by the family business.
When stakeholders fail to measure the right expenses, it can negatively impact profits, but effective profit measurement actually improves the decision-making process in the family firm. By giving profit a greater meaning, it can be a valuable tool and used as a reference point when family members consider: the budgeted profit compared to the actual profit, the current year’s profit compared to the year before, the business’s profit compared to competitors’ profit, and much more.
To successfully navigate the subtle, but important nuances of profitability, seek the help of a business coach. At AdviCoach, we help business owners implement key policies to help manage the family’s expectations of profitability and growth. To learn more, contact us to be connected to a business coach. Your profitability is our business!