Kenji Kuramoto, Acuity Founder and CEO
Kenji Kuramoto is the founder and CEO of Acuity, a full service financial firm that builds and maintains financial functions for innovative entrepreneurs.
The following is a transcript from an interview between Square and Kenji Kuramoto. It has been edited for length and clarity.
Let's talk about profit and profitability. You might be growing your profits year after year, seeing a rise in revenues but…why is your profit margin staying the same? How do you reach the point where your business, as a whole, is profitable? We dive into the financial tools and strategies business owners can leverage to reach that break-even point and beyond.
Kenji: Understanding your own profitability, I relate to what I call more unit economics. So the unit economics of your business, to me this should be how having clarity on your profitability means you understand how the business works and how it makes money. Essentially the formula is all your revenues, less your expenses. You subtract those expenses out of the revenue and hope there's profit, not a loss. That's your profitability.
When you're raising money from an investor as a small business or a small software company, you have to go out and talk about these things and put projections out to talk about these to potential investors. "Here's how my business is going to become profitable." So you have to focus on the unit economics. Here's the way the business works. When it comes down to profits versus profitability, the reality is more, how much profit did we have in a particular period of time?
How much profit did we have in the first quarter this year? last month? last year? Even though I might have a great understanding of the overall profitability of how my business... life happens in our small businesses. Things happen, right? Maybe the ice cream truck breaks down and needs a bunch of repairs in one particular month. Maybe you lose some of your team members. So things happen that will affect the profit in that month. It doesn't mean the business does not have profitability. It just means there are going to be some short-term things that may not line up there.
Are there tools you'd recommend business owners use in order to keep an eye on profits and overall profitability of your business?
Kenji: One of the standard reports that comes with any accounting software, no matter what you're using (you're not going to get this looking at your bank account) are the income statement or profit and loss statement. Even if you're not an accountant (and most business owners are not), it should resonate with you. Your income statement, that you can look at monthly, should make sense to you for the most part. If not, get some accounting help there to help you look at it. I think most business owners pick it up pretty quickly and I think looking at your income statement is a first step in understanding your profitability. That is there to provide you indicators and your profitability. It does do it on a snapshot basis.
One of the ways it's helpful is by lookiing at your income statement over time. One of the ways I like to look, they call it a trended income statement, is month by month. I think all of us tend to think about our businesses month by month, naturally. We can think about the things that happened each month. So I like to see multi-month trended income statements and through that I have a few formulas built in there. And again, some of the accounting software does these formulas like gross profit percentage or net income percentage for you. It's just a simple ratio. You might have gross profits, divided by the total revenue. Your gross profit is really just derived by your total revenues less the costs directly associated with that revenue.
How can business owners leverage these tools and make adjustments to optimize their business? Can you give us an example?
Kenji: A good example using a bakery would be the things that captured within gross profit, when reading take all the costs out of all those baked goods, all the raw materials, the flour, the eggs, and things like that are part of costs. Tracking that gross profit margin over time will be a helpful indicator in seeing, "gosh, are our margins staying the same? Are they rising? Are they falling?"
In some cases you may have a strategy as a business where you're okay with the gross profit margins falling a little because you're going to try to drive revenue up instead. You're interested in driving revenue up higher and maybe what you'll do is hold off on increasing your prices initially and see if you can get more people to buy. That could be one strategy, as long as you're knowingly doing it, that's fine. However, if there's a large divergence over a large period of time, whether it's a gross profit or net income, your measure of ultimate profitability (how much money that's the business make)...if those start growing or shrinking at a different pace than revenues growing, something's going on. It's hard to see that sometimes without looking, maybe a on a trended basis month by month. If you see a pattern, a trend of margins growing or shrinking at a different pace than the growth in revenue, that's something a business owner should dig into and understand a bit better.