14 Reasons That Explain the Importance of Profitability in Business

Profit is our first name. Literally - our business name is Profit People Systems. So why is profit important in a business? 

Now, I know that you probably didn't start your business just to make money. You might even say that "it's not about the money". I would certainly agree that it's much more difficult to create a successful business if there's no meaning it it for you.  But ask yourself the question - would you do it for free? 

Many of us, especially if we want to create a freedom business, would say that our businesses are more about  meaning before money. But money is still important, and no, we wouldn't do it if there was no money. 

As that's the case, we need to be intentional about making as much money as we can from our business and being as profitable as possible. 

It's not just us who thinks that profit is important. Mark Cuban, the billionaire entrepreneur from Shark Tank, said on a podcast earlier this year that this is the number one mistake that most entrepreneurs and business owners make - they don’t focus on profitability. He says that you have to focus on profitability from Day 1.  You have to make sure that every sale is profitable. 
 
Unsuccessful business owners chase growth at all costs, successful business owners focus on profitability, because they know that profitability is the only way to scale, and grow sustainably. 

So let's talk about the importance of profitability in business. 

Why is Profit Important for a Business?

As business owners, we naturally want to grow our businesses and we focus on growth as our first priority.  We think that growth is success and that growth means an increase in income as well as in the overall value of our business.

The problem is when we believe "growth is success", we think that means we should reinvest all our money (including our profits and our personal funds) back into our expenses. We believe that the increase in expenses will be covered by the increased revenue from our larger, growing businesses. The problem is that reinvestment into growth makes a business unstable, as it creates high costs and reduces cash on hand. This instability can make slow sales periods a killer for business. 

We chase sales looking for more growth, and we ignore the expenses. Losing money is emotional and we don’t always think rationally. 

The problem is that growing a business that’s not profitable simply means that you’re increasing your problems. 

We're not saying that sales and income growth isn't important. It is. However, increasing sales and revenue without increasing the profitability of your business is not sustainable in the long term. 

Learn how to increase profit in your business with this FREE download.

More Reasons Why It's Essential to Make a Profit

1. Meeting commitments

One of the most fundamental reasons why profit is essential is so that you can pay your bills, your suppliers, your team and your taxes. If you can't pay these, you've got no business. 

2. Paying for help

You can't do everything yourself. A key factor in business growth is being able to afford a team to help. When you're starting out, as you start to turn a profit you can buy back some time and hire other people to help you grow. As you get bigger and more profitable, you can hire great people because you can afford good salaries. And that, in turn, helps you grow even more. 

3. Pay off debt

Your company's profitability helps you to manage and reduce your debts. When you've got no debt, you can afford new opportunities that will help grow the business even further. And it's less stressful for you as the business owner when you don't have any debt to repay! 

4. Invest in systems and efficiencies

Another reason why profit is essential in business is because you can use some of that profit to invest in systems to create efficiencies in your business operations and ultimately, reduce costs and business expenses. Whether that means new machinery with the capacity to manufacture product more quickly and efficiently, or investing in training for yourself or team members, increasing efficiencies in how you deliver your product or service will help you to increase profits even further. 

5. Competitive edge

Another reason why it's important to make a profit is that you can use the money to create a competitive edge, through things like investing in marketing, customer service, or technology.

6. Business growth

Profit is proof that your business model works. When you know it works, you can carry out your business plan and confidently start to scale and grow even further. 

7. Risk reduction

Profit acts as a buffer against economic downturns and unexpected events that affect your business activities, which buys you some time while you work through the problems. Putting money aside before you hire, for example, allows you to see whether you can really afford that new team member before they're even on board. 

8. Build working capital

Another reason why profit is important is that it allows you to build up funds to cover expenses during slow seasons. Many businesses are seasonal, and all businesses have busy and slow periods. Having a profitable business means that you can cover costs all year round and smooth out cash flow ups and downs. 

9. Asset purchases

Having profit in the business means that you can afford to invest in capital items and infrastructure like equipment and machinery. Even if the only machinery you need is a laptop and a phone, knowing that you can afford to replace or upgrade these items is another weight off your mind. 

10. Business valuation

The profitability of a business directly impacts the value of the business. The more profitable the business is, the money you're likely to get for it if you sell it. 

11. Help your community

Profitable business can help their community through job creation and philanthropy. When you've got money, you can help other people. 

12. Personal rewards

As the business owner, profit is your reward for the risks that you take in owning and running a business. A business is a high risk asset, so if you're not making good returns on it, you'd be better off putting that money to better use somewhere else. 

13. Lifestyle

This is what most of us start a business for - so that we can improve our lifestyle. Ultimately, profits are what gives us the freedom to create the lifestyle that you want for you and your family.  

14. Financial sustainability

Profitability ensures the long term financial success of your business, allowing it to cover costs, reinvest, and grow. Profitable businesses are more likely to endure and prosper over the long term, creating a legacy. And even if you're aiming to sell your business rather than own it for a long time, healthy profit margins mean that you can use that money to create a legacy for your family. 

Plan for Profit

Many business owners make the mistake of thinking that once they reach a certain level of income, that they'll just naturally become profitable. While it may become cheaper to run per client or product thanks to economies of scale, it doesn't always follow that a bigger size means that you'll be making a profit in business.

It's absolutely essential that you understand the importance of profitability when you're wanting to grow your business. And like everything in your business, you need to plan for profit and be strategic about how to improve profitability.

Want to know how to increase your profitability? Grab your free download, here.