Planning, Startups, Stories


Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

Entrepreneurs: Profits are Overrated 10

Real entrepreneurs don’t make profits, and for good reasons. Huge oil companies make excess profits, sure. Smart entrepreneurs don’t.

And I don’t mean just the land-grab web companies like Facebook and Twitter don’t make profits. Growing companies don’t make profits. Can you be more successful than amazon.com and Jeff Bezos? Amazon didn’t make profits until relatively recently. No, I mean small business everywhere.

Ideally, you do want enough in profits to support an increase in working capital, which would be a single-digit percent of sales. But that’s rare in growing companies.

Where do profits come from? Money you take in as sales that you don’t spend in cost of sales or expenses. And if you want to grow, then money that might have been profits goes right back into expenses as more product development, more marketing, more smart people on payroll.

When Palo Alto Software was growing at double-digit rates during its teenage years, I made the order of priorities as clear as I could: cash flow break-even first (we didn’t have outside investors); growth second; profits third.

What do you think?

  • http://timmceneny.wordpress.com Tim S. McEneny

    Tim….We have much in common besides our name. I also started a software company and built it to 40 employees w/o 3rd party funding. We became profitable in Year 4. My priority list was Breakeven first, Profitability second, and Growth third. I think you reversed 2 and 3. Cash-Flow means everything….and forget about GAAP Accounting if you are a self-funded company. Cash is king!.

    • http://timberry.com Tim Berry

      Hey, other Tim, thanks, and good to sort-of meet you, that is an interesting coincidence there … but I’m sticking with my own order of priorities. Cash flow first, then growth, then profits. The point of common ground is we’re both agreeing that cash flow self sufficiency comes first. There is some low-level profitability (not spending more than you bring in) to cash flow break-even, so we’d probably end up agreeing if we got together and talked it out. I said profits are overrated, but I didn’t say I like losing money. That’s a luxury we — neither you not I — never had.

  • http://airandheatsystemsva.com William Ball

    Since when did profit become a dirty word? Wasn’t it Jimmy Carter who instituted the “windfall profits tax” during his pathetic term as POTUS? In my service and contracting business, there are some customers who still do not get it: business is not a hobby or a charity. That doesn’t mean we gouge people. Reinvestment of profit is the responsible action. And, certainly much better than giving more in taxes to the government to waste.

    • http://timberry.com Tim Berry

      William, aha: what you call “reinvestment of profit” is what I call choosing growth instead of profits. I didn’t say profits are a dirty word, I said they’re overrated. For reasons I hope I explained. Tim.

  • http://spinsucks.com Gini Dietrich

    God bless you for this! I’m going to do something very 1990s and print this and take it to investor meetings with me. :) OK. I’m joking. Sort of.

    • http://timberry.com Tim Berry

      Thanks Gini, I’m always happy to see you here, and thanks for the RT too. But, wait a minute, 1990s?

  • http://www.antsaint.com/ Anthony St. Clair

    Makes sense to me. I remember my dad, who owns & runs a pipeline contracting firm, telling me similar once. He was saying to his crews, “Guys, profits don’t mean that I go out and buy a motorcycle. Profits mean new trucks, new equipment, new staff for more jobs.”

    It often seems the word “profit” gets immediately associated with “brazen wanton excess”. Profit can be some dough stashed away, but yes, overall it’s fuel for growth and goals.

  • http://boomerama.org Annie

    You make a great point. During the tech wreck many companies had overstepped and therefore were out of business. Trying to grow your business to fast can be a a big problem.

  • Ciff Elam

    “Huge oil companies make excess profits, ”

    5% margin is excess?

    What is your company doing?

    _XC

    • http://timberry.com Tim Berry

      Cliff, sorry, no, I don’t think 5% profit on sales is excess. I assumed the major oil companies make much more than that. I apologize for assuming. Is it true that major oil companies make only 5% on sales? And for the record, in my company, we aim for 2% profits on sales, and rarely do better, because we spend the leftovers on product and market development. We do practice what I’m preaching here. Tim