It goes without saying that all people wanting to start their own business are ambitious. But not all ambitious people are entrepreneurs.
A real entrepreneur is someone who can look at their business with an honest, analytical eye from every angle. They are not the sort of people who get carried away with media coverage and start to believe in their own PR. To the real entrepreneur, PR is simply another tool, not a means to personal glorification.
And this is where the difference between VANITY AND SANITY comes in.
Those who succumb to vanity look in wonder at their turnover, whereas proper entrepreneurs look carefully, but with great pride at their profit.
Because at the end of the day – or should I say Financial Year, it’s all about the bottom line.
Let’s look at a couple of hypotheticals and explain to the uninformed, why turnover does not necessarily equate to profit.
Let’s call the guy who is very proud of his $25 MILLION turnover MR VANITY.
MR VANITY, a brilliant salesman, has a mortgage lending company. He is very successful but focusses on achieving high total sales and not his bottom line.
But the market is very tough and can be erratic. Plus his margins are very slim and his fixed overheads are high.
Mr VANITY is walking a tightrope.
He has a healthy turnover, no-one will deny him that. But it’s his profits, not his turnover, that pay his salary, employee wages and the expensive rent on his swanky office.
Additionally he thinks it wiser to spend a lot of his pre-tax income rather than pay tax on it.
This is where it is time to look at tightrope analogy again.
Everything is fine while his income stream is constant in both volume and regularity.
However, if there is the slightest blip in sales, he has no cash reserves to cover those fixed costs and no fat in his margin to trim away. In fact, he will have to fight very hard just to keep his company afloat.
And if the blip does happen he will have only a few options. He can:
1. Borrow from the bank – If he has security (normally the equity in his home) and borrowing is expensive.
2. Let some staff go – Can be expensive and will be disruptive.
3. Move offices – It will be expensive to break his lease and pay for the move. Plus it will disrupt his business.
But there are other, non-monetary consequences of keeping a company afloat.
Stress is one and loss of focus is another. When things get really tough, survival becomes all-consuming dragon whose fire must be fed.
When this happens Mr VANITY cannot focus on what he is really good at: securing the new customers he desperately needs.
At this point Mr Vanity is losing his balance on the tightrope.
Now let’s compare him with Mr SANITY
MR SANITY’S company, a product wholesaler, has a turnover of just five million dollars. Eighty percent less than MR VANITY’s but his profits are much higher and he has smartly kept his fixed overheads to a manageable level.
His projections, which he updates regularly, are based on a worst, not best case scenario but his targets are aimed higher. In other words, he knows exactly what he needs to earn in order to run his company smoothly, while his targets allow him to aim for additional extra profits, not survival funds.
Sure he may pay a little more tax, but there are more ways than one to defray such costs and some of his extra profits have been used to pay for the best accountants and tax lawyers he can find.
Extra profits generate him a lot more gross and net profits because all his fixed cost overheads have been covered by his worst-case scenario projection and the nice little pile of cash from earlier extra profits has been invested in other things that are working away for him without requiring much additional attention.
Better still, if things did get really bad for him, those assets are his to use as he needs.
If however the extra profits keep rolling in then his actual profits (both gross and net) soar.
The difference between Messrs Vanity and Sanity is the former is working harder whilst the latter is working a lot, lot smarter.