The death spiral of profits is meant to sound dramatic because its impact can be dramatic.
It’s based on the idea that lower expectations of your profit breed lower profits, so you then lower your expectations…
If you think things are going to be tough then you give yourself an excuse for not taking action.
You allow negative thoughts to stop positive actions.
Lower profits become a self-fulfilling prophecy and many business owners have seen it happen with the recent recession.
It’s the opposite of the logic that lurks behind the idea of stretch goals.
If you target a ten percent improvement, your mind doesn’t get excited by the challenge and your subconscious doesn’t highlight opportunities and you don’t have the motivation to take action…because the payoff is so small.
If you challenge yourself to double your profits in the next twelve months, your mind starts buzzing with ideas…and provided you are selective and persistent in your actions…you will find your profits have a big increase.
Meet Peter the Printer
Let’s look at an example – I’ll call him Peter the Printer.
Two years ago Peter had a nice business, it made a profit of £50,000 before paying him.
Then the talk of a possible recession …and how many businesses would be cutting back on their marketing…caused him to lower his expectations. Peter set a target profit of £40,000 in his mind.
He admits that he didn’t push as hard as he could for new business during the year and he achieved a profit of £32,000.
He didn’t think that was too bad in the circumstances …but feared the next year would be worse, perhaps down to £25,000 profit provided he cut out all the non-essential costs.
Peter found himself thinking “If I can just ride out the recession, then things will get better…and I’ll be OK.”
For Peter, his business was the only source of cash to pay his living costs and he didn’t have savings to draw on.
It got to the stage where he was struggling to take out of the business, the money he needed to live each month.
He built up his credit card debt but he quickly reached his limits where the required payments and interest were more than the extra he could put on the card.
He finally realised that something must be done…but he’d got no time or money left to do it.
Peter The Printer has been a victim of the Death Spiral Of Profits.
Return to P1M2 What Is Profit
Or go to Reversing The Death Spiral Of Profit
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