When it comes to business, value and profit are two words that often go hand-in-hand. In fact, they are used in the same sentences so much that they begin to take on a synonymous relationship. Every aspiring entrepreneur looks at successful business owners and judges their worth by the amount of money that each one has made in his or her lifetime. The more cash flowing into the company, the better it is.
Or so it seems.
This way of thinking is common but inaccurate. Value and profit are not the same thing, and to mistake one for the other is an elementary error that could cost you the opportunity of being able to build an enterprise that could make a difference in the world. In order to separate yourself from the rest of the pack who have trouble breaking into the industry, a change in thinking is necessary.
What is profit?
Profit is traditionally described as the amount of money gained versus the amount of money spent (Company revenue minus expenses). If the former is greater than the latter, then the company is said to be growing. If not, then it is falling into debt. This is a key measurement of success that is utilized by many businesses around the world. Owners would celebrate if profits go up and fret if they go down. For them, the entire health of the company completely hinges on its ability to generate cash from its customers and the public.
“Profit is not the legitimate purpose of business. The legitimate purpose of business is to provide a product or service that people need and do it so well that it’s profitable.– James Rouse
Value is the present value of the company’s current and future profits. The major downside of using profit as a yardstick of company health is that money does not have any intrinsic worth. There is nothing standing behind the dollar, peso, or euro that would translate to any real value. Consider the constant fluctuations in foreign exchange rates: every day, the estimated significance of a certain currency rises and falls depending on the economic conditions. When banks and countries collapse the value of their currency also plummets significantly. The private savings of investors, that were worth millions in one day, could wind up worthless the next. This is the reason why many individuals scramble to trade paper currency for tangible goods like gold and land during an economic meltdown. Paper and coin is not as safe as one would assume, and to place all your trust in it is to put yourself at the mercy of a ship that could sink at any moment.
What is true value?
Rather than measure the worth of a company by turning to profits, it is preferable to base it on matters that one wouldn’t normally associate with value. These things might include:
- The amount of time spent by employees on important matters as opposed to useless projects is a value in itself. Is the company taking too long to improve one of its products or is it streamlined enough that the process can go forward without much interference? Any business would benefit more if it focused its attention towards the correct management of its time and resources.
- This can refer to the self-determination of each individual employee. While they are many great companies out there that empower their employees and management teams with incredible autonomy and decision making. There are many other companies that restrict the people working for them by too much micromanagement and bureaucratic red tape. Each decision has to be approved by someone else of higher authority and hence the process suffers a slow death at the hands of individuals who may not understand the effect and impact it has on the process and revenue. Freeing up the hierarchy so that each employee has enough leg room to make their own important decisions without delays will increases the value of the company and positively impact employees’ moral and contributions.
- This refers to the principles and lifestyle on which the company as a whole bases its entire operations. A poorly defined identity will lead to conflicts within the system as different employees focus on different things that matter to them rather than working towards a common vision and goal. A well-defined identity means everyone knows what is expected of them and feels a sense of being part of a greater good.
- Probably the most important measurement of value is the individual talent and abilities of the people working in the company. If the business owner manages to get his or her hands on a superstar employee with unlimited potential, that alone could skyrocket the success of the entire enterprise. Likewise, proprietary information such as blueprints and company-specific methodologies should also be closely guarded.
- A low turnover rate is a good sign that the company is providing value for its employees. When fewer people are leaving the company to pursue other ventures it means that they are finding meaning and purpose within it. A fulfilled workforce translates into better interpersonal communications and more energy to spend on developing the company.
“My goal was never to just create a company. A lot of people misinterpret that, as if I don’t care about revenue or profit or any of those things. But what not being just a company means to me is not being just that – building something that actually makes a really big change in the world.”– Mark Zuckerberg
The temptation of basing success on profits is that money is tangible whereas other areas such as time, talent, and happiness are more abstract concepts that are difficult to measure. However, focusing too much on money can make one lose sight of the bigger picture. When you direct your attention towards those things that have true value and make an effort to cultivate them within yourself and your team, the end result leads to a direct increase not only in satisfaction but also in profits. Companies that strive to create true value rarely suffer from long-term losses. In fact, they are often the ones who get the most money in return for their efforts.
The fear that distracting yourself from financial returns could cause the business to collapse is misguided. On the contrary, the more you spend time on more durable things, the more money seems to flow your way. Contrary to popular opinion, you can’t put a price tag on your business. The same goes with everything else in life that really matters.