Struggle Every Day to Stay Small
Volume 12, Number 10
Issue 558
The best companies that I have ever seen are the ones that realize that they can be most profitable by staying as small as possible. Sure, huge companies with large numbers of employees can make many hundreds of thousands of dollars in profit, but you and I probably will never be able to have one of those. But, what can we have? We can have a company with a few--say, five, employees that makes $300,000 to $500,000 in profit for a sole owner. Sound extreme? Think I am exaggerating? Well, I have a lot of those companies as clients and they all started with one owner with a great idea, a great business plan and a well-defined target market.
The worst-managed small businesses focus too much on cash-flow sales volume and trying to get as big as possible rather than simply focusing on making as much profit as possible with the smallest cost of delivery (overhead). I see many companies with 25 employees and up that have way too much administrative costs associated with too few dollars in sales. One of my benchmarks is always to take the company‘s gross sales and divide by the square footage of dedicated office space. You should always be having at least $300-$350 in gross sales per square foot of office space. If you don‘t have this level of sales, especially in hourly service businesses, you probably have lost touch with making money and are spending too much money on the business of doing business.
Just like the adage “the business of government is government,“ entrepreneurs often become so enamored with “the business of doing business.” The most profitable companies that I have ever had the honor to serve as their CPA have less-than-fancy office space and do the most that they can with very little. These companies are frugal with overhead. The dollars are real dollars to them. The owners never, no not ever, lose touch with reality.
I think that one of the differences that makes small companies more successful than large ones is that the owner-operator spends dollars frugally, just like they do in their personal life. How in-touch can a huge company be with the frugality of business spending when they have stopped signing their own checks and writing their own payroll?
Mark Henricks, a business writer in several national publications states that "too much of management is often based on volume and size. Many entrepreneurs want to say 'I have a company that's this big, with this many people, this many square feet of space.‘”
I’ve always thought that that type of thinking is placing too much emphasis on the appearance of doing well rather than on actually doing well. Less-than-successful business owners think that bankers and investors want to see the business doing well by appearance but, actually, the exact opposite is true. Ultimately, the only thing that really matters in business TO ANYONE is the ability to sustain and to generate continually-growing profit IN ADDITION to the ability to pay the owners equivalent fair market value salaries for the time that they spend in the business. After all, the only way that a business has any value relating to any premium above and beyond the net realizable value of “assets minus liabilities” is its ability to generate sustained earnings and profits without the day-to-day involvement of the owners. If such an ability exists, that’s “goodwill.” In the absence of an ability to generate profit, a business is only worth what its assets will realize in an asset sale, minus any liabilities.
Entrepreneurs are into creating and building, but they also have to learn to channel that energy into building sustained profits. Entrepreneurs who focus “only on the gross” by thinking that sales are the secret to success are not realizing that sales dollars mean absolutely nothing. It’s profit that matters! I could start a company today with $5,000,000 in sales instantly. I would do this by selling things that cost me $7,000,000. I wouldn’t be around in business very long. I wouldn’t be generating profits. A business with $300,000 in sales with $100,000 in overhead is worth far, far, far more.
Entrepreneurs that focus on building monuments to themselves with fancy office space, buildings, large staffs, plush furnishings and large quantities of employees are wasting their profit dollars by simply not being frugal. Remember, a wasted dollar in expense is a wasted dollar of profit. By cutting expenses to the bone (or never letting them get out of control in the first place), every dollar in low expenses is a dollar that is just as green as a harder-earned dollar of profit.
David B. Robinson, CPA
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