There’s a simple business axiom on which I think we all can agree: “If you can’t turn a profit, you really don’t have a business and you won’t stay around very long.”
This doesn’t mean you have to turn a profit day one—few businesses do, and even the IRS assumes most businesses won’t turn a profit until year three of operations—but you do, eventually, have to turn a profit. Otherwise, why are you in business? Are you just looking for something to do . . . or for a tax write-off?
In a previous blog, I looked at innovation and how just because something is deemed “innovative” does not assure its commercial success (think laser discs, Betamax, HD DVDs, and going way back, the DeLorean, and way, way back, the Edsel!). The truth is, innovations abound. They always have and always will. Innovation is how we move forward artistically, scientifically, even spiritually. Lack of innovation is akin to the dark ages, and that won’t do anyone any good.
Yet, innovation just for innovation’s sake is really nothing more than pie-in-the sky thinking, a glorified hobby. Thomas Edison, considered by many to be the most prolific inventor ever, and certainly of the 19th and 20th centuries, came up with many innovations in his lifetime: the phonograph, electric light bulb, motion pictures, among many others. He even built a research lab and hired a team of inventors to work for him. Edison was also a business owner. He understood the nature of profit and loss, and how his innovations, to be truly successful not only had to capture the hearts and minds of the public—they had to turn a profit.
Not everyone needs to be an Edison or a Nikola Tesla or a Steve Jobs to be a successful innovator. Successful innovators can come in many shapes and sizes—from someone who develops gadgets and physical products, to must-have services such as improved manufacturing processes, technological advances, or business systems.
What successful innovators share, though, is that their innovations are commercially viable. Yes, Virginia, you can be creative and profitable at the same time!
Think about it, without profit, do you think Apple would have dazzled us with the iPod, iPhone, and iPad this past decade? Apple was nearly dead in the water in the late 1990s, despite its innovations. Only when those innovations became profitable did the stock (and the legend) take off.
Successful innovators not only consider the practical applications of their ideas—will this product solve a problem or fill a need—the entrepreneur in them also weighs whether the idea will be sellable. In other words, will anyone want or buy the resulting product or service?
So how do you determine if an innovation is worth your investment of time and resources to develop?
The first place to start is to get a handle on your businesses actual Profit and Loss (“P&L”). This will give you a sense of cash flow available to keep your business going and to invest in new opportunities (such as your innovative idea).
The next step is to build a forward-looking P&L statement around your idea to see how it will affect the business. What you want to answer are “How much time and resources will developing this new product/service take?” and “How will offering this new product/service impact my bottom line?”
P&L typically looks at sales versus expenses in a given timeframe. You’ll probably want to model likely scenarios by quarter, half-year, year, and two-years looking at your variable, fixed, or discretionary expenses:
- R&D Costs (these could be one-time and/or ongoing)
- Cost of Goods Sold/Cost of Delivering Services
- Sales & Marketing Expenses
- Salaries, Admin, and Operating Costs
Now estimate what your sales will be near-term, mid-term, and long-term. You may even conduct a market survey among likely users of your product or service to gauge interest so you have a better idea of what to expect on the revenue side, to include anticipated volume/demand and price break points (what people are willing to pay).
Next, subtract your expenses from sales revenue, and hopefully you’re near break even or in the black . . . if not in year one, then perhaps by year two or three.
If you’re not happy with what the numbers reveal, revisit your assumptions. Did you estimate your sales too low? Are there places where the cost of delivering or selling your product or service can be lessened? Could the product or service be “tweaked” in a way to make it more desirable or make it appeal to a broader audience?
Try different scenarios to see what the numbers are really telling you, and then decide. Numbers don’t lie. If you’re not seeing what you want to see, then maybe your innovation isn’t worth it—at least not in its present form (and it’s back to the proverbial drawing board).
Of course, some will say looking at innovation through the lens of profit and loss will only stifle the creative process. Maybe. But then again, if I knew my idea was a likely winner, such knowledge might actually spur me on. So use this simple P&L analysis as a tool, not the ultimate gatekeeper—whether you “go for it,” in my humble opinion, is still the purview of your “gut” and what it’s telling you.
When ideas strike, do you look at the big picture? Do you say to yourself, “That’s a cool idea, but is it commercial?” Do you take the time to understand how the product or service will impact your profit and loss?
Share your experiences here . . . plus any advice you have for would-be entrepreneurial innovators.