Making Smart Decisions with a Profit Tree

There is no shortage of decisions to make when running a business. Indeed, all the various questions and possible answers can be overwhelming. It helps to remember that, for the most part, every business decision is about profitability. Should I lower my price? Should I rent or lease? What level of insurance do I need? Should I name my business ‘sex’, ‘drugs’ or ‘rock and roll’? In the business context it’s all about maximizing our profit.

Below is a simple profit tree, through which you should run every business decision you make. The tree doesn’t answer your questions per se. Its value is in making sure that you are considering many or all of the implications as you try to answer your business questions. We will be referring to the profit tree regularly here at Simplrbusiness and will be going into much greater detail on all of the various branches. We start today with a basic overview.

Profit is a function of your revenue and your costs, in simple terms the money you bring in minus the money you have to pay out. Both of these are influenced by factors or “levers” --- for example the price you charge plays important role in your revenue, while your office rent (a fixed cost) is an important part of your overall costs.

Let’s take an example. Let’s say you sell teddy bears and I ask you your plan for being more profitable two years from now. You might say you plan to aggressively sell more teddy bears and get more market share by expanding into this new region or this new product line (teddy tigers?) because others are not offering teddy tigers. OK, that’s a start, but those answers sounded generic and lofty- more aspirational than actionable.

This type of response, which I hear quite often, is informed more by “gut feel,” not sound reasoning – it’s not very structured, thoughtful or comprehensive. Besides, the question was “profitability”. What was described is really expansion- not profitability. What about the costs associated with all the ‘more’, ‘new’ and ‘expanding’ that you have planned? Those ambitious plans just might make you less profitable. When I hear a response like the one above it suggests that someone doesn’t feel like they make enough money from their business today. If true, you might falsely think you need to expand to make more money when in fact, it could be the case that you simply need to address cost issues to make your existing business more profitable. In our next installment, we will run our question through the profit tree and get some better answers.