I’ll never forget the day one of my employees asked me how I slept at night, being motivated entirely by greed. She discovered one day how much we charged the client she was working for and knew what she was getting paid and incorrectly assumed the difference was our profits. I recently found an article written by a former SCORE colleague, Tuck Aikin, several decades ago that address this very issue. Some of the facts contained in his original article have become stale with time, but the message remains as true today as it was when Tuck penned them. To ensure the message continues to resonate with readers today, I took the liberty to update some of his original facts but kept the intended message intact. I hope you enjoy it as much as I did.
For anyone who’s never owned or been responsible for operating a business, any size business, there seems to be a prevalent opinion that profit is the only thing that matters and that owners and operators are primarily driven by greed, regardless of the consequences. Yes, we know about high profile magnates like Elon Musk, Jeff Bezos, Donald Trump, Richard Branson, and Bill Gates, but do these individuals and their opulent toys really tell us anything about the drive for business profits? “All they care about,” goes the belief, “is more – more money, more power, more luxury. It’s never enough with these people, they’re just greedy, and when they can, they grab as many of our hard-earned dollars as they can!” There is no doubt that businesses strive to secure and, if possible, increase profits, but is that so the owners or principals can hoard away more lucre for their insatiable appetites, or is something other than greed the motivating factor? In fact, there is something other than greed that is a far stronger motivator for profits – the need for survival!
“…profit is a necessary, absolutely critical ingredient for an organization to stay in business… In its simplest form, profit is an indicator of how well the business is performing, a feedback mechanism to correct and improve performance. On a more fundamental basis, however, profit is the insurance to ensure survival in an uncertain future, it’s the investment capital for future expansion of jobs or new machinery, …it pays the taxes to run schools and build roads. There’s no doubt there is such a thing as greed and fraud in business, but that shouldn’t be confused with the notion of operating profit.”
Morris Engelson
So true.
In market-driven economies such as ours, all businesses are surrounded by dynamic change. There’s always a new idea, a better way to do things (just think of the Internet), or a market niche not being fully or effectively served. This means that over time established businesses have to constantly adjust and change just to maintain their presence, let alone grow. Services have to be embellished and improved, products have to be upgraded, new models, new styles, new equipment, new everything. And presuming your market is expanding, as most do if your business stays the same size, that means demand gaps are opening that will be filled, if not by you, then by someone else. A failure to respond appropriately, then, means your own business will suffer the consequences. A gradual malaise will set in, followed by chronic financial illness and eventual demise.
The lesson in all this is, of course, that just to survive, business owners and operators must continuously feed money into their enterprise, money for new equipment, hiring and training new employees, and conducting research and development. In a growing market, nature abhors a vacuum. And where does the money come for all this? The primary source – profits. Our financial institutions know this, which is why they so often insist on a record of profitability before they will extend a business loan. Without profits, failure is likely, and how on earth can the loan be paid back then?
When thought of properly, profits actually belong to the business, not to the owner(s). Owners who fail to understand this basic principle, who draw down exorbitant salaries, benefits, and other ‘perks,’ will soon discover that their business is in trouble because there’s no money to fund basic survival. The definition of ‘exorbitant’ varies hugely from small businesses to large corporations, but the best way to determine it is from the viewpoint of the survival needs of the business.
Assume profits belong to the business first, ascertain the long-term needs of the firm for survival, including a reasonable reserve for inevitable economic downturns (losses have to be funded too), then what’s leftover can be made available to the owners. That can be a pretty large sum in the case of big publicly held corporations but meager for small privately-owned businesses. This is often why business owners and operators are so economically conservative. Just to see that their enterprise survives, they have had to deny their own desires to accumulate personal wealth to assure their family’s future financial well-being.
Sometimes even the enormously wealthy receive relatively modest salaries during the year in the hopes that at the end of the year, enough profit will have been earned by their firm to be able to afford to pay out a large bonus.
Multi-billionaire Warren Buffet is reported to have set his own salary at $100,000 a year, and it has stayed that way for decades regardless of his firm’s spectacular investment success. He’s been around long enough to know that success is transitory and markets are fickle. What works today can be gone in a heartbeat tomorrow (remember Blockbuster and Toys R Us, and what used to be the world’s dominant retailer Sears?).
So the next time you’re tempted to chastise businesses for pursuing profits because of greed, remember that the people running them are mostly just trying to keep the competitive wolf at bay.
Tuck Aikin was a former SCORE colleague of mine for many years until his retirement. Tuck is a prolific writer and wrote small business-themed articles for the Colorado Springs Gazette for many years. As a co-mentor, Tuck was my inspiration for me starting this blog. The preceding post is reproduced with permission from the author.
