Why profit is the main indicator of business success

Entrepreneurs often focus on the wrong thing. When they talk about the results of their business, they brag about the number of outlets and employees, turnover, site traffic. And in words it looks cool: “I have three retail outlets”, “I have a turnover of 100 million per year”, “I have a traffic of 5,000 users per day”.

But it is wrong to evaluate a business by these indicators. They show a distorted picture. And a seemingly successful business can exist on the brink of survival.

Illusions that interfere with evaluating business success

1. It is imperative to get bigger

Entrepreneurs are passionate about the scale of their business. They believe that the larger it is, the more and the earnings that the company brings. But this is not true.

Vladimir had a furniture store in the regional center. The entrepreneur consistently took 150,000 rubles a month from the cash register. But it was not enough for him. He decided to open two more stores in the regional center. The population is larger, incomes too, people are more active - this means that sales will go, profits will increase. But something went wrong.

Before opening new points, Vladimir calculated only an increase in sales. He did not think about new expenses, but there were a lot of them. Transportation of goods, new warehouses, the cost of opening stores, rent, salaries - everything costs money. In addition, there are more competitors in the city.

For a year of operation, the maximum monthly profit for shops in the regional center was 15,000 rubles. It's also good that I didn't have to work at a loss. But Vladimir should still think about whether all his works are worth 15,000 rubles.

The scale of the business can be impressive, but the profit margins are small.

2. The higher the turnover, the more successful the business

Entrepreneurs love to measure a business by its turnover. But what these turnovers lead to is delicately forgotten.

Pasha sells office furniture. He has a turnover of 8.5 million rubles a month. Pasha wanted to take 400-500 thousand rubles from his business every month.

The financial statements showed that such expenses would be to the detriment of the business. Yes, there is a profit, but it does not exceed 430 thousand rubles. Due to regular prepayments from buyers, the illusion was created that it was more. Customers paid, and the goods were received only after 12 days, so a lot of money accumulated at the checkout. In fact, these were clients' funds. Most of them relied on suppliers.

If Pasha began to take the desired amount, money would not be allocated for development, the business would eventually become unprofitable. So it turns out that the turnover is large, and the profit is much less.

3. The main thing is to invest in marketing

Marketing metrics are useful for measuring the performance of marketers. They do not help much to assess the effectiveness of a business.

Leonid has an online gift shop. A week before March 8, he decided to allocate 300,000 rubles for advertising. There are a lot of orders, just have time to deliver. On March 7 and 8, he decided to spend another 400,000 rubles on advertising. The marketer reported 2,000 purchases per week.

On March 9, Leonid calculated the results of the holiday period. The result was a loss of 200,000 rubles due to the fact that too much money was spent on advertising. But from a marketing point of view, everything is great, you can brag about the number of sales.

Entrepreneurs often forget about the most important thing - profit

Business performance needs to be measured in terms of profit. The rest of the indicators are an intermediate stage on the way to the key one.

In order to properly evaluate their work, an entrepreneur needs a tool that links intermediate indicators with profit - a financial model.

The financial model is a tool for business planning.

All key indicators are entered into it: conversion, average bill, cost. The financial model shows how the growth of these indicators increases the profit.

A financial model does not work without analytics from the head of the business. For example, you calculated how much an increase in traffic by 5,000 visitors per day would give a business, and you saw that the profit would increase by 150,000 rubles per month. An inexperienced leader will immediately run to give an assignment to a marketer. The sensible entrepreneur first finds out the price of the issue. Maybe 5,000 visitors will cost 200,000 rubles. Then he will start looking for other options to increase profits.

An example of a financial model →

Financial Model Template →

If Vladimir had drawn up a financial model before opening new stores, he would have seen that expenses would grow faster than income. Pasha would have learned that he earns little from his large turnover. Leonid would have a sales funnel that would show the highest possible bid price for him.

It is important to remember

When it comes to business efficiency, the main thing is profit. Only if everything is in order with her, the leader is really great. The rest often only creates the illusion of success.
Other indicators are also needed (average check, conversion, site traffic), but only when they affect profit growth.
Entrepreneurs look at the impact of each indicator on profit using a financial model. From it you can understand how much profit the growth of a particular indicator brings.