Mike Andes explains why small businesses struggle with profit-sharing plans. Many don't define what profit means to employees, and fast-growing companies often have no cash to pay out despite showing paper profits, because growth eats cash through equipment and hiring.
I see a couple, like on the smaller side of business, like say under $2 or $3 million, I see two big errors. One is definition of profit when it comes to profit sharing. Like, are we talking on the bottom of the P&L? Are we talking about distributions? Are we talking about after debt expense, before interest? Like, is this EBITDA? Like defining what that is very clearly for the employee. And then also for locations in growth mode, i.e., let's just say growing more than 30, 40% a year, Giving profit sharing is likely the most demoralizing thing to do because it puts the— this illusion in front of someone that is impossible when you're growing so fast. Because growth sucks cash. You're buying more trucks, you're hiring more people, you're expanding. And like you talked about last week, hey, if you want to keep growing, I'm okay with a smaller margin. That might be fine for the owner, but if you put in front of the manager, operations manager, general manager, hey, you get profit sharing, there's this expectation that I'm going to get something. And if you're growing fast, there might not be any profit.
That's a fantastic point right there.
The definition of the profit too is so important because a lot of times it's like, well, the P&L. Well, if you have debt, now all of a sudden your principal paydown doesn't show up on your P&L. And so you could look really profitable, quote, on paper, but have no cash in the bank to actually pay them a profit sharing. So I did that mistake very early on. I was like, hey, we look at the P&L and you get a piece of the bottom. And then all of a sudden it's like, okay, because at the beginning when I had skid steer debt and truck debt, etc., back in the day, all of a sudden I'm paying out profit sharing when there was no profits realistically after debt service.
