Profit is one of those concepts that most business owners understand in theory but struggle to achieve in practice. Knowing what it means and knowing how to generate it consistently are very different things, and the gap between the two is where most businesses run into trouble.
Running a profitable business is a skill not a personality trait. This skill develops through years of experience and draws on capabilities across multiple areas. Selling well is part of it, but selling at the right price is equally critical. Most of us have underpriced our work at some point (it’s almost a rite of passage). We’ve explored this in other posts, such as this one on value articulation, the three thirds model, and the 40-40-20 rule, which help you arrive at a price that builds profit in from the start rather than hoping for it at the end.
Beyond that, you need to be able to deliver your product or service in a cost-effective way. Are your people productive? Are they efficient? Are you overpaying them? This is the territory of expertise in operations, and you need to think about managing people well, motivating them, and making sure they keep good records. Are they delivering on client work? Are they busy for the right reasons? This kind of management never ends; it’s day to day and week to week. Doing this well is the difference between being profitable or not, and it’s not easy.
Why is profit important in a business?
Before getting into the how, it’s worth being clear on the why. There are four fundamental reasons profit matters:
- It’s your return on risk. Unlike employment, running a business comes with no guaranteed salary, no pension, no sick pay, and no redundancy package. Profit is the reward for taking that risk. Without it, there is no rational case for being in business at all.
- It funds growth. Whether you want to hire, invest in technology, open new locations, or simply build a cash reserve, profit is what makes that possible. Businesses that consistently break even have no engine for growth.
- It determines the value of your business. When the time comes to sell, merge, or bring in investment, the value placed on your business will be largely driven by its profitability. A business that doesn’t make money is worth very little on the open market (more on this below).
- It signals that the model works. Consistent profit is proof that your pricing, your cost structure, and your operations are aligned. It’s the clearest indicator of a healthy business. Consistent losses, by contrast, signal that something is structurally wrong – regardless of how busy you are.
A different way to think about profit
A book that reframes this question in an interesting way is Profit First by Mike Michalowicz. The conventional approach treats profit as whatever remains once all the bills are paid – a residual, an afterthought. Michalowicz argues for inverting this entirely. Every time revenue comes into the business, he argues, you take your target profit out first and move it to a separate account before anything else gets touched. Want 30% profit? That 30% leaves the main account immediately. What remains is what you have to run the business on.
The idea draws on a well-known principle: if money is available, it tends to get spent. If you’ve ever heard of Parkinson’s Law, you’ll know the adage that “work expands so as to fill the time available for its completion”. The same logic applies to money in a business bank account. Overheads, subscriptions, unplanned purchases, and scope creep have a way of expanding to meet whatever is sitting in the account. By removing the profit before that process begins, you eliminate the possibility of it being absorbed. Your cost base is forced to adapt to what’s left rather than consuming everything available.
It’s not an approach I’d advocate universally, and for some businesses it would create cash flow complications. But as a way of shifting your mindset – from profit as a leftover to profit as an obligation – it’s genuinely useful. The broader point stands regardless of the method: waiting passively to see what remains at year end is not a strategy.
Having a good salary AND making a profit should be the aim; otherwise, you could simply go out and get a nice, secure job in someone else’s firm.
Taking a more aggressive stand on profitability
I believe that there’s a psychological dimension at play here, too. A lot of business owners feel they don’t deserve profit, that it’s somehow excessive. If we’re making a decent salary, isn’t that enough? If we do make a profit, we don’t want anyone to know because it’s somehow a bit grubby. Some people worry about what employees or clients might think if the business is seen to be doing well.
But consider what running a business actually involves. You carry financial risk that an employee never faces. You fund your own retirement. You cover your own healthcare, parental leave, and sick leave. Your income can disappear overnight if a major client walks, a market shifts, or a global event disrupts your sector. There is no floor beneath you.
So profit isn’t a bonus; it’s compensation for exposure. If your salary AND your profit together don’t make the business more rewarding than working for someone else, the arithmetic doesn’t add up. Many owners, however, never get there. They pay everyone else before themselves, skip their own drawings when cash is tight, and treat personal sacrifice as a virtue rather than a warning sign.
I believe this is fundamentally wrong and not the right way to run a business. If your business is generating value and sustaining employment, you are entitled to be paid properly for it. When profit fails to materialise, the cause is nearly always a gap in skills or systems – both of which can be addressed.
You CAN drive profit. You CAN influence it. Our proactive approach, based on the four cycles, means that it’s easy to target profit and make it a priority. As an example, you could create a rapid improvement project (RIP) based on getting employee billables from 28 hours per week to 31 hours per week. It’s not a huge change – maybe you restructure their schedules, tweak the workflow, or allow them to work from home one day per week – but the effect on profitability can be substantial.
Examples of for-profit business structures
It’s worth noting that the push for profitability applies across all standard business structures. Whether you’re operating as a sole trader, a partnership, or a limited company, the fundamental requirement is the same: revenue must consistently exceed costs.
A limited company has the added dimension of distributing profits to shareholders, which creates an additional layer of accountability around profitability. Sole traders and partnerships tend to feel the impact of poor profitability more immediately, since there’s no corporate structure to absorb the shortfall (it comes directly out of the owner’s pocket). Regardless of structure, a business that doesn’t make money is a liability, not an asset.
The fallacy of the bad year/good year
A business that is genuinely managed for profitability shouldn’t have years it describes as ‘good’ or ‘bad’ – at least not in terms of profit percentage. If your market contracts by half, a well-structured business should be capable of reducing its cost base in step, preserving its margins even as its absolute size shrinks. The danger comes when revenue falls but overheads don’t – that’s the scenario that turns a difficult trading period into an actual loss, and it happens because the cost structure was never properly tied to the revenue model in the first place.
A well-run business should always be profitable. There was a period when it became fashionable – particularly in the VC-backed tech world – for startups to run at a loss for years on end, trading profitability for market share and user growth. Some well-known names made that work. But they represent a tiny fraction of the companies that attempted it. For every household name that emerged from years of losses with a dominant market position, there are thousands of businesses that burned through funding and folded with nothing to show for it.
That model has aged poorly. Investors who once tolerated indefinite losses in exchange for growth metrics have become considerably more demanding about the path to profitability. The era of ‘growth at any cost’ is largely over, and businesses that prioritised scale over sustainability have found themselves in serious difficulty when funding dried up. The lesson – which was always true but is now more widely accepted – is that it’s better to build profitability in from day one and grow at a profit. Balance what you spend with what you bring in at every step.
Profit margin vs markup, and what they mean for your business
Two terms that come up constantly in discussions about profitability are profit margin and markup. They’re related but measure different things, and confusing them can lead to significant pricing errors. We’ve covered both in detail – including the formulas and when to use each – in a dedicated post on margins vs markups. If you’re not completely clear on the distinction, it’s well worth a read, as getting this wrong is one of the most common reasons businesses underprice their work.
Profit and the value of your business
Profitability doesn’t just matter for day-to-day operations – it’s also the primary driver of what your business is actually worth. When a buyer, investor, or acquirer looks at a business, their starting point is almost always profit. The most common method is to apply a multiple to EBITDA (earnings before interest, tax, depreciation, and amortisation). The multiple varies by sector, size, and growth trajectory, but the principle is consistent: the more reliably profitable your business, the higher its valuation.
A business turning over €2 million but making €50,000 in net profit will be valued very differently from one turning over €1.5 million but generating €300,000 in net profit. Revenue is noted; profit is what gets paid for. This is yet another reason to treat profit as a non-negotiable objective rather than a pleasant surprise at year end.
Building the profit skill over time
My key learning from years of running and owning businesses is this: as the owner, you should not forgo your own salary while building the business. Pay yourself the market rate for the role you perform, and then factor your profit on top of that. Profit is not a bonus; it’s a business requirement. It is necessary, worthy, and should be targeted from day one. But profit isn’t easy, and it may take years to develop all the skills and knowledge needed to drive a business profitably. That’s not a reason to deprioritise it. It’s a reason to start working on it now.
