When starting a business, profit, rather than some grand purpose, must be the goal from the outset, serial entrepreneur and investor Ed McLaughlin argues.
He's neither mercenary nor cold-hearted. He knows the odds: Most new businesses fail.
To counter that, you must focus intently on profit from Day 1 – actually, from even before then. If you do well, then you can build an even stronger business and some day give back to your community.
Author of The Purpose is Profit, he faced those odds in the 1990s recession, when he came across a memo left accidentally at the copier of the giant real estate firm he was working for.
It contained three scenarios for the future, two of which specifically excluded him. In fact, he wasn't turfed, but he decided to take his fate in his own hands and start a firm that would handle real estate matters as an outsourcer for large companies.
With two kids under the age of five and a modest amount of money for starting up, failure was not an option. "I needed to make a profit. It was not start up and see if it would work," he says, in an interview. "I had one nest egg, not three. It was survival."
He has a chart in his office, a continuum, with user growth at one end and profit at the other end. Some businesses, unicorns as they are known, can have exponential growth in users and profits as well. But they're rare. Usually, you must focus on one or the other. For most entrepreneurs, that means sustainable profits with modest growth.
Devise a plan to generate revenue
His 10 Commandments of Start-Up Profits – published as a manifesto on the ChangeThis website – warns not to start up until you know how you will generate revenue; understand how much it will cost to run your business; identify how you're going to make a profit; have preorders to validate your business model and liftoff plans; and have lined up the financing to cover operations until you break even, which typically will take 18 months.
That sounds elementary. But it's also uncommon. He's not asking for perfect projections. Some of the calculations will be back of the envelope. While revenue can be difficult, expenses should be clearer to calculate. You need to be honest and cautious.
Find your user base
It's vital that you line up customers even before launch, proving the product or service has appeal. In his case, two of his existing clients agreed to stick with him when he left to start his own company. "There's no point in jumping off the cliff and then see if the parachute works. It's better to test. Find out if somebody will pay for what you're offering," he says in the interview.
As well as calculating costs, you want to minimize them. That can start at conception. He kept employees' salaries low, at the level they needed to subsist, but compensated by giving them a share of the profits. "They cashed in, big time, later," he says. He recommends looking, as he did, for an office sublet, one that will come due in about 18 months. Usually, you can negotiate a good discount for such vacant space and if the business is struggling, you are not locked in for a long period. He also paid his rental costs up front, from his nest egg, but that meant his expenses for the next period were kept low.
Watch those expenses like a hawk. Your ability to build a profitable business is directly proportional to your ability to take charge of the money. He was chief financial officer for the first three years as well as chief executive officer and reviewed the numbers every night to ensure he wasn't getting ahead of himself in expenditures. His staff knew he was watching their spending – a good message to send them.
Create incentive for staff
Another commandment is to create a profit-based reward structure. In his firm, almost everyone was part of that sharing, but he stresses with sales staff in particular that you want it based on profit not revenue, so they aren't sacrificing the bottom line to gain orders. And if you can, create profit centres to scale your business up: When you establish new product lines or new geographical centres of operation, make each one responsible for generating a profit.
In every case, his advice is directed at one central point. The fixation should be on profit – profit as soon as possible – from the moment you start thinking about going into business. Don't be seduced by other dreams.