Profitability: A Tale of Two Roads

Two Roads“The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.”
Henry David Thoreau, Walden 

You’ve heard of the road less traveled. Can you picture yourself weighing out the cost of a new car in exchange for a family vacation, a smaller home, or more time at the office and calculating the value of whatever that entails? If we manage all of our decisions as if we have a very limited amount of time/money then, of course, one may choose to keep their current car and keep up the tradition of going to the lake with their family. How much are those memories worth?

Now, imagine weighing out all business decisions when overseeing a job and asking the same type of question. More often than not, a business owner has more than one perspective in mind that may lead to different roads. Consider these two perspectives: 1) When I send an invoice to my customer, will it reflect the value of life that it takes to deliver this outcome? 2) Once I send this invoice, which I lowballed in order to win the job, will I measure and control each cost in order to obtain the target profit margin? Most businesses have leaned toward the latter, but even that approach falls by the wayside when a business is just trying to manage the land mines. To a business owner or sales person, landing any job is perceived as potential income. But is that really a true statement?

I am working with a client who is setting goals for the year. One of them is to get the best Gross Profit Margin for their Services. The formula is calculated like this:

Gross Profit Margin = (Revenue – Cost of Goods Sold/Revenue)

Every industry has its own measure/benchmark with a suggested margin. Every business yearns to meet or beat that industry specific margin and consider that as their measure of success. The business must execute flawlessly in order to minimize redoing work and incurring more costs. This requires solid processes and best practices for tracking costs per job and quality control. Every job has a value which has to generate enough profit to pay for the cost of that sale/revenue as well as any operational costs and paying down debt. This is a common business perspective. But what if you were looking at the cost of doing business the same way as Thoreau? I wonder how would one creates a proposal based on sacrificing employee/business owner’s time in order to put them on that job. What is that person truly worth with respect to their intellectual contribution? What type of value would they bring to the outcome of the work?

On a solopreneur (solo entrepreneur) level, If I want to take on a new customer, what is the cost of me doing the work vs. hiring a new employee? If I want to get the maximum out of the money I receive, wouldn’t it be better if I just did the work and not pay someone else? Most solopreneurs do not  put a value on their time as it relates to the work they are doing. At best, they will charge the going rate for the services they sell. If you measure this against Thoreau’s perspective, they would have to assign a cost to the value of an hour of their life. And if they are doing work that most people would value at $15.00 an hour, wouldn’t they then only be worth just that? On the flip side, what would you pay to have an hour to recharge your mind or what is the value of the owner having a lunch with a future prospect?

The same holds true if you are a bigger business. Let’s just say that your company has 50 employees. What is your company’s specialization and how do you equate the intelligence involved in a prospective job to how you create a proposal? How do you deliver value to your customers? What does the company value and how is that demonstrated from the top down? What part does the business owner play in this company? Are they out in the shop mopping the floor because they value a clean workspace? Are they crunching numbers to be affordable and still deliver a quality product because they hope to receive excellent feedback? Are they managing the employees and their day-to-day experience because their concern for employees outweighs the time they spend elsewhere? For every layer of a business, the business owner and employees hold positions of value.

Are you making sure that each person is paid for their value? Is the value you place on that Customer invoice reflecting the value of each person’s skill set? Or are you just controlling costs in order to achieve the margin of your dreams? Two roads, my friends, tell me about which road you have choose.

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