But probably can't
The Entrepreneur Insider network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “What’s something you wish you knew before starting your business?” is written by Rick Crossland, founder of A Player Advantage.
One of the biggest things I wish I knew before starting a business is how to share with my employees the concept of purpose beyond profits. Over the years, I’ve found that both employees and leadership are often confounded with how to reconcile generating profits alongside fulfilling the purpose of the business. In other words, is the purpose of the business to produce a profit, or is it something entirely different? This is an important evaluation, because simultaneously optimizing both of these outcomes isn’t covered in the curriculum of even the top business schools.
You may wonder how that’s even possible. Administer this simple quiz with your team: Ask your team members what the net profit of your business needs to be to sustain healthy operations. How many of them can answer that? I’d be very impressed if anyone outside of the finance department actually knows what constitutes a healthy net profit target for the business. Typically, the net profit needs to be 10% of revenue or higher in any business to generate the investment needed to produce the sustainable growth for your company to fulfill its purpose. If your business or industry typically generates a higher percentage, then adopt the higher standard. Imagine the possibilities to your business if your employees were actually aligned t0 this.
Our employees are not taught that a net profit margin of 10% of revenue or more is needed to generate the very elements of prosperity they want: things like a strong mission and purpose, accomplishing social good, raises, promotions, bonuses, profit sharing, capital investments, hiring more employees, and more. We talk about profits, but a sustainable benchmark that needs to be achieved to sustain the company purpose is rarely shared nor understood with the entire team. I am often asked why this isn’t taught. And while I don’t actually know the reason, I can tell you it’s an education that needs to begin ASAP.
At the present state, the vast majority of your employees probably don’t have a clue what financial returns the business needs to stay in business, much less generate the prosperity for the purposes it wants. Financial principles in business are exactly akin to personal financials, but too often they are confined only to the inner sanctum of the finance department. Teaching your team how to read an income statement and balance sheet—as well as holding them accountable to drive the results that matter—will empower them to drive for the profits that produce the noble purposes they want—both inside and beyond the business.
See also: 11 Easy Ways to Be More Successful
To drive home this quandary of profit vs. purpose, let me share with you another example in which you have probably been involved: developing mission statements. While mission statements should definitely state your company’s purpose, whether or not they should include a profit metric is less clear. After all, isn’t that a little trite after pouring out your noble purpose of the great things your company and products contribute to society? Besides, won’t including your profit goals make you seem greedy? In reviewing these statements, what if your best customer sees that your profit targets are actually higher than theirs? Will they come back to you for price concessions? Finally, if you do decide to include profit metrics, do your employees really care about them and understand them anyway? These are real issues we have all seen time and time again.
The resolution to this apparent conflict between purpose and profit is resolved with the simple and powerful phrase: Profits exist so we can fulfill our purpose. Conscious capitalism calls this purpose beyond profit. Often a net sum game is wrongly assumed. I have found that people are really fond of saying you can have one, but not the other. Of course, the real magic is in delivering both. The better way of thinking about profits is that healthy profits allow us to continue to sustain the fun of delivering our ultimate purpose. Employees need to realize that this profit number should be 10% of revenue or better to sustain the business’s noble purpose.
One way we have resolved this in the companies in which I am involved is through a document called Prosperity Principles that outlines the profit and financial parameters required to fulfill the purpose of the organization. It should also define those prosperity factors—purpose, promotions, raises, etc. that appeal most to employees. We have had tremendous success in engaging employees with this approach, particularly purpose–driven millennials. They appreciate the transparency the document provides regarding the connection of the profits to the purpose of the organization.
Rick is author of the soon-to-be-released book, The A Player. He works with companies across the country to transform good companies into great companies with his unique A Player approach.
Read all responses to the Entrepreneur Insider question: What’s something you wish you knew before starting your business?
The One Regret Everyone Has After Starting a Business by Susan Drumm, CEO advisor and leadership coach.
Striving for Perfection Can Ruin Your Chances at Success by Diana Murakhovskaya and Irene Ryabaya, cofounders of Monarq.
The Painful Truth About Starting a Business by Suneera Madhani, founder and CEO of Fattmerchant.
This Should Be Your No. 1 Focus When Starting a Businessby Christy Johnson, founder of Artemis connection.
The Easy Way to Stop Wasting so Much Time by Greg Sewitz, cofounder of Exo.
The Real Reason so Many Businesses Fail by Catherine Bell, cofounder of BluEra.
Here’s How to Know Your Business Is Headed for Disaster by Andrew Ackerman, managing director of Dreamit New York.
Here’s Why You’re so Discouraged With Your Career by Simon Berg, CEO of Ceros.
Doing This for an Hour Each Day Can Make You More Successful by Dennis O’Donnell, cofounder ofPAW5andClear-Coat.
Why This Entrepreneur Doesn’t Regret Leaving His Successful Business by Chris Boehner, founder and CEO of Western Natural Foods.
The Most Important Thing You Can Do Before Starting a Business by Josh Reeves, cofounder and CEO of Gusto.
The Important Business Lesson Too Many Leaders Ignore by Aidan Fitzpatrick, founder and CEO of Reincubate.
What Google and Richard Branson Can Teach Us About Success by Alexander Goldstein, founder and CEO of Eligo Energy.
Here’s Why You Should Start Working Less by Erik Severinghaus, founder and CEO of SimpleRelevance.
The Dangerous Mistake Too Many Leaders Make by Fayez Mohamood, cofounder and CEO of Bluecore.
The Biggest Challenge Every Entrepreneur Faces by Jeff Ruby, founder and CEO of Newtopia.
Here’s What Happens When Your Company Only Focuses on Data by Allison Berliner, founder and CEO of Cataluv.
What Every Entrepreneur Should Be More Prepared for by Feris Rifai, cofounder and CEO of Bay Dynamics.
Why Virtual Offices Don’t Work by William Vanderbloemen, founder and CEO of Vanderbloemen Search Group.
The One Quality That Defines a Great Entrepreneur by Anthony Katz, founder of Hyperice.
What Every Entrepreneur Can Learn From Apple by Michael Maven, founder of Carter & Kingsley.