If wages come from work and rent comes from land or property, where do profits come from?

This was one of the questions posed in this month’s seminar ‘The Numbers that Matter’ and is a great starting point for the theme of this month’s newsletter, business finance.

The standard answer is that profits come from sales less expenses, but we invite you to consider the following: profits come from risk.  Profits only arise in business and all business entails taking on a risk.  Starting one is like taking on a bet, the bet is that if you invest some time and money into a venture you will reap some profit.  You see an opportunity to sell at a price that allows you to make a profit and you take the opportunity.  Ultimately we can never know the future, anything could happen.  You could be wrong about the price that customers will pay or the cost of doing the work,   circumstances could intervene, literally anything could happen.

So business is a calculated risk.  As an aside, we notice at Crunchers, that the tendency in business is to play safe and follow the crowd.  To succeed we need to risk being different.  Nevertheless, however we set up we take on a risk.  If you think this through, this implies that something is at risk and clearly what is at risk is some time or money.  Given that most of us can only afford to invest time at the expense of some money, we can simplify and say what we risk is our money, our capital.

Whilst this might seem obvious, the truth of this tends to get lost once a business is established.  Having experienced the tremendous risk of starting out, we tend to get more risk averse and avoid it  in the future.  In short we revert to human nature.  However a business cannot stay static, the environment shifts around it and we need to be able to respond, shake up the business, rethink and continue in the process that got us into profit in the first place – namely spotting an opportunity and risking some capital to make a profit.  That is why investment capital is so important to business.  Investing is not a one-off thing, it needs to be part of the culture of a business.

It is also one reason why people use the expression ‘Cash is King’.  Without cash we aren’t in the position to spot an opportunity and exploit it, and if we aren’t, probably a competitor is right there, stepping into that space.

Given the current climate of lending from banks, we explore some other resources available at this time in the rest of the newsletter – Invoice Finance, Asset Finance and Crowd Funding.