We've been running our family plumbing business for about seven years. During that time, our definition of “success” has shifted dramatically.

At first, it was enough that we were making revenue. Perfect strangers were willing to give us money to do work for them — fantastic! That lasted about two months. We wanted more. More revenue meant we could grow. We started setting goals and defining what success meant.

We wanted to hire more people, add more trucks, buy more equipment and purchase a commercial property. Alongside all of that, we found that revenue growth is a bit addictive. It's like winning a popularity contest over and over again. Bragging about things like triple-digit growth is super fun.

Soon you start finding more creative ways to slice and dice the numbers. Month over month, year over year, average sale, gross revenue, net revenue. It becomes an art form. For the first time in your life, you think that percentages are fun. 

After a few years of this relentless pursuit for more, we hit all of our initial goals. We had to redefine success and set new ones. During routine succession planning discussions, we decided to see how much our company was worth if we were to sell it. We have no plans to sell. It was just an exercise — a “what if” curiosity.  

Here is what we found: The typical way to value a plumbing business is a multiple of “earnings before taxes.” In other words: Profit x Some Number (typically 3/4/5) = Sale Value.

Simple enough, but that means that for our little empire to be worth anything on paper, we had to optimize for profit. 

We hadn't been optimizing for profitability, so we focused on the top number, not the bottom. The time had come to switch our focus. We decided to hit pause on growth. We would create stability and grow profitability. 

Along the path to setting these new goals, we realized revenue had become a vanity metric. It wasn't telling us anything about the health of our company.  

A Profitable Company

Profitability is a relatively simple equation. For the most part, if your expenses are less than your revenue, you have profit. Depreciation and other advanced accounting topics can sometimes make things a little wonky on paper, but 90 percent of profitability comes down to consistently spending less than you earn.   

Yes, profit means paying taxes. But having money left over also allows you to do a lot of other things:

• Expand your business. You can add locations in other markets, expand your service offerings, acquire other companies and more. We had checked this box.

• Save money. Having cash on hand is an excellent idea because plumbing can be a seasonal business. If you want to have enough left over for a good emergency fund, profits are necessary.

• Borrow money. If you require additional capital in the future, the banks want to see that your business is profitable. 

• Build personal wealth. Chances are you took on some financial risk when you started your company. That may have set you back for things like retirement and future security. Profit allows you to make up for lost time over and above your salary.

• Be more generous. Wish you could offer your employees more benefits or perks? Want to donate to nonprofit organizations? Profit gives you the means to do good things.

• Sell your business. If you plan to retire one day and hope that your business will outlive you, profit is necessary. It shows an outside investor that there is value in what you have built.

I've heard it said that a business without profit is just creating an unnecessarily difficult job for yourself. That's the truth. Being a business owner is not easy, and profit is your reward over and above your regular income, however you choose to use it.

How much profit?

Estimates of “normal” or “healthy” profit for a plumbing business differ wildly depending on the source. It also depends on the type of work you are doing — service, new construction, remodel — and the maturity of the business. A common goal is 12 to 15 percent of total revenue.

Ultimately, you decide your profit margin. There is no limit and no right or wrong answer.

Managing for Profit

So many small businesses treat profit like a luxury, something that would be nice to have one day. Like most things aspirational, you get what you want by working for it. As a business owner, you are familiar with this concept. Your business didn't happen by accident. Sustainable and optimized profit isn't going to happen by accident either.

Learning to manage your business for profit takes a shift in mindset. For instance, you might focus on the effectiveness of your marketing and cost per acquisition more than overall spend. In fact, your spending may decrease over time. 

It also means getting comfortable with your numbers. You need a budget. A budget holds you accountable. Math doesn't lie. Following the numbers will highlight problems and opportunities with astounding speed.

If you've never created a budget for your business before, don't get intimidated. It's not hard, but it is time-consuming. If you've been in business for several years, start by looking at previous years’ profit and loss statements. Think about your goals for this year and how it might affect each line item. Use this information to fill in a blank profit and loss sheet for the future — typically a year. Use past numbers as a guideline, increasing or decreasing based on expectations.

You don't have a crystal ball. The one thing you know for sure about your budget is that it won't be accurate. It will hold you accountable though. A monthly budget review helps you understand where you are meeting your expectations. Areas of overspending may require more management or oversight.

Leading for Profit

Your team will notice the shift in your priorities. Especially as you start making different decisions to meet budgeting goals. They might wonder why the sudden change in expectations.

It's crucial your team understands the new focus. Get buy-in by laying out your vision for the future. Hopefully, this includes a positive change to the employees’ lives as well. It's up to you how much you share with your team, but leaving them entirely in the dark may be scary and cause tension. 

It's strange how a business can take on a life of its own over time. At some point, you look up and realize that this thing you've built is big. Bigger than you. The reality of growth is that your job as a business owner gets harder. Ignoring profit is a long-term mistake that could cost you dearly down the road. Success gets defined in different ways, but so is risk. A profitable company is less risky and meets anyone's definition of success.

About the Author

Anja Smith is managing partner for All Clear Plumbing in Greenville, South Carolina. She can be reached at anja@acpupstate.com.