It’s become common for businesses to claim their success by stating high sales numbers and believing that that is what makes them successful. And yes, high sales figures can be impressive, but the success measure lies in how profitable a business is, not sales numbers. It’s important to understand the difference between profit and revenue.
What is the best definition of profit?
Profit is what is left at the end of the day after expenses and taxes are paid. Profit is what you get to keep for yourself as a business owner or you can put it back into the business to invest or grow your business.
A business cannot survive on good sales numbers alone, which is why you need to understand the difference between profit and revenue.
The primary factor with profit management is to ensure that the cost of generating sales is controlled and that business costs do not exceed the income that the business is generating.
Profit meaning
Profit = Revenue – expenses – taxes
The key to monitoring the profit margin when you have high sales levels is through good bookkeeping records that are accurate and timely. Bookkeeping is the input of the financial data. This needs to be accurate as your reports will all be based on the data.
With accurate and timely records, you can run financial reports that will tell you the financial health of the business and you can base your financial decisions on the feedback you receive from these reports. That is when you will understand the difference between profit and revenue.
The top ways to keep profit in your business:
- Focus on selling your most profitable services
When you know the profit margin of each product or service that you are selling then you will know which is the most profitable, and you can spend more resources promoting that item.
- Trim your expenses
To be as profitable as possible in your business, costs need to be controlled. Regular monitoring of your costs ensures that you prevent budget overruns and regular monitoring allows you to identify issues before they turn into big problems or money leaks.
- Increase your profit margins
A profit margin is a ratio that demonstrates how much profit you will make on a sale of an offer before taxes. By breaking down the costs of each product or service that you are selling you will understand what drives your profit margin up or down.
- Invest in your business
If you don’t understand the difference between profit and revenue, invest the time in learning this skill. The return on investment will pay itself many times over through the proper management of your business finances. You will find ways to generate more profit and save money year after year.
- Understand how every business decision you make affects the profit line
Every business decision you make impacts your bottom line either directly or indirectly. When you understand how your business decisions are affecting your bottom line, you will make smarter business decisions that keep the profit in the business.
- Know your cash flow
Cash flow is one of the most important areas that keep you in business, so monitoring your cash levels is essential. If you can’t keep up with bill payments, you won’t stay in business for long.
You need a good cash management system so that you’ll know what bills you have coming up, and if you have enough cash in the bank to cover them. This allows for proper planning and if a potential problem arises, you can be aware of the fact before it stresses you out and you lose money.
Knowing your cash flow activity allows you to be proactive.
Although sales are important when running a business, they are not the determining factor to success. Success lies in the ability to manage business expenses to ensure you are not spending more money than the business is generating.
When you know your business numbers, you can easily understand what your financial reports are telling you, and make adjustments as needed so that your profit line will increase.
Increasing your profits without increasing your sales
Knowing what it takes to build a profitable business means knowing what the best definition of profit is, and I am going to share with you my tips on making your business more profitable without bringing in an additional sale.
Before I share those tips with you, I’m going on a bit of a rant.
The business community is filled with business owners who are bragging about their sales… “I’m a 6 figure business… 7 figure business… multiple 6 figure business…”. Whatever does that all mean???
I am sharing my expertise and I want you to know that your revenue numbers, regardless of how high your revenue is, do not determine how successful your business is.
I have seen many multi-million dollar businesses go bankrupt due to financial mismanagement.
Being a professional accountant, I understand that what these entrepreneurs and influencers are throwing out there is what I call “vanity numbers”. These numbers are meaningless to me, in terms of measuring the success of their business.
What makes your business success lies in the profit line.
What is the best definition of profit?
PROFIT = Revenue – expenses – taxes
If you are talking to me about 6, multiple 6, or 7 figures of PROFIT, you now have my attention, and respect.
It is an accomplishment to get your revenue to those high levels that people are bragging about, for sure that is a huge accomplishment – but what is difficult about that level of revenue is controlling your costs to ensure that you are making enough money to keep your business sustainable through the long haul.
I want you to understand that although revenue numbers are important, you should focus your attention on your bottom line – PROFIT. That’s where the reward is because that’s what goes in your pocket.
When you understand the difference between revenue and profit you will pay much more attention to profit.
When you know your numbers, and understand them, you can plug the money leaks in your business and make your business more profitable. And you will understand what the difference is between profit and revenue.
What is the difference between profit and revenue: a story
I want to walk you through an example so you can better understand of what I’m trying to tell you. I’m going to make up a completely fictitious company that I’ll call Rosie’s company.
Rosie is an influencer who is in high demand. She shares publicly about her multiple six figure business that offers an online course, she has a weekly podcast, huge social media following, she looks like she has it all. She travels to all the beautiful destinations, joins mastermind classes, and is living the high life. That is what it looks like on the outside.
On the inside, Rosie is a bit of a mess. She pulls money from her personal and business account when she needs it, isn’t very good at tracking her books, knows that she’s making very decent money since her sales are so high, but at the end of the year when she filed her taxes she was shocked by her tax bill, and even more shocked to learn that there wasn’t enough money in her account to cover it.
How can that happen when Rosie’s company is bringing in so much revenue? Let’s have a look at her expenses.
This is where you will understand the best definition of marginal cost.
Because Rosie is not keeping accurate bookkeeping records she failed to collect about $60k in money owed to her from clients, she paid about $150k in marketing ads to sell $240k of her online course, she spent $30k to join a mastermind, and travelling costs & fees to attend conferences in the pre-covid days amounted to $25k.
From that list, these are just the big money leaks. little ones can add up to a significant amount as well.
And the money leaks I’ve identified in Rosie’s company are very common, and easy to fix. When you get into a method or system of reviewing your financial reports and know what kind of irregularities to look for, you will be saving a lot of money and headaches.
As a business owner, much of your time is spent focussing on ways to reach your clients and help them — and that makes sense, because the work you do is important. But the easiest way to increase profits can be overlooked, and that’s by looking at your internal accounting structure.
If you’re not keeping your bookkeeping records organized and current, you are wasting an opportunity to tighten your costs and increase the financial health of your business. When your books are current and set up well, you can run those numbers and get extremely valuable feedback on how your business is performing.
And now, keeping in mind the meaning of profit, I will reveal the top five tips to keeping the profit in your business:
1. Know your cash flow.
Cash flow is one of the most important areas that keeps you in business — if you can’t pay your bills, you won’t stay in business for long. So if you’re short on cash, that will likely stress you out and keep you up at night. According to a U.S. Bank study, 82 percent of business failure is caused by poor cash management.
When your recordkeeping is set up with a good system, understanding your cash flow position is as quick as clicking a button to run your report. You’ll know what bills you have coming up, and if you have enough cash in the bank to cover them. This allows for proper planning and if a potential problem arises, you can be aware of the fact before it stresses you out and allows you to be proactive.
2. Be current with client payments.
You will want to keep your books current, so you have to invoice clients immediately, which gets your payment in the door a lot more quickly. You can also run reports on a weekly basis that will show when clients are late in payment, so you can follow up quickly and prevent a late payment from becoming an issue.
Early payment follow-up helps with maintaining excellent client relationships and client retention because your client will appreciate your organized and efficient follow-up, rather than having a payment dispute down the road.
3. Save money on late payments.
Current books mean you know what payments are due when and you can manage your cash flow to ensure you have the cash to pay the bills when they’re due. This saves a lot of money on late fees and interest charges. And this helps maintain supplier relations. Your suppliers will value you as a good client, and often offer benefits or discounts for preferred clients. And if you’re in a pinch and need special attention from them, they’ll help you out happily.
According to Sage, one in 10 invoices are paid late, resulting in a global impact of $3 trillion.
4. Know your profit margins and adjust accordingly.
Know what profit margin levels you want to keep in your company, and monitoring those margins allow you to see when your profit margins are falling short, you can correct immediately.
If a supplier increases the price of a product you need from them, you will see immediately how that will impact your profit margin. When you see the cost structure of the product you sell you can easily make adjustments and scenarios to see how these changes affect the overall margins for the products.
5. Identify the money leaks before they become a big problem.
When your books are current, you can see where you are spending more on a service than you intended to. Marketing is typically a large expense, so keeping current records allows you to monitor the dollars you’ve spent there and helps you manage your budget accordingly.
Running regular reports allows you to determine earlier on when you are spending too much on a certain expense in your business.
When you keep a good accounting system in your business, your financial reports will identify issues early in the process and resolve issues before they become a bigger problem, and you can plug money leaks in your business very quickly.
Just by tightening up your accounting processes and procedures, when you start plugging money leaks, make cost adjustments and changes, you are ensuring you are keeping your business profitable.
When you see how these systems make your life so much easier and help you make your business that much more profitable, you’ll wonder what took you so long to get these systems in place.
These systems take a lot of stress out of running a business because you will be confident that you know your business, you understand the difference between revenue and profit, and you make the most profitable decisions for your business.
How important are your revenue numbers?
My pet peeve is when you’re short on cash the experts are telling you to make more sales. Get another product out there, throw another launch, make money!!!
But what does that all mean?
It’s terrible advice, because if you haven’t fixed the leaky bucket, just adding more sales at the top doesn’t fix the problem.
Fix the problem first, then increase sales.
Yes, high sales numbers are impressive, and definitely something to be happy about. But when I’m looking for value in a company, that is not where I look. Sales numbers mean nothing without profit attached to it.
What is the best definition of profit?
Profit is the amount of income that remains after all expenses, costs and taxes are accounted for. Sales only consider the amount of income a business generates through the sale of its goods or services, profit considers both income and expenses when it is calculated.
The value is in the profit, because that is what is left over for you. It’s in your pocket after taxes.
And if you mismanage the business expenses, chances are potential profits are being eaten up by excessive and high business expenses.
When you don’t have a budget created for your business, it’s very easy to get off track and spend excessively. There are advertising costs which take a huge chunk of the budget. Travel expenses, course costs, masterminds, hiring consultants and professionals to help you, and then your everyday business costs. And it all adds up.
It is entirely possible for a 6-figure entrepreneur to have almost nothing in the bank when they are not monitoring their expenses. I’ve heard stories of new business owners going into crazy debt to “look the part” of a successful business owner, which essentially means they had to have all the latest and greatest.
When running a business, it is important to have direction. You need to decide what profitability levels you want to achieve for yourself and your business. Do you want to build wealth? Do you want to be in business for the long term? And in what time frame would you like to achieve your goals?
When you budget you can plan out how you will achieve your goals, and ensure that you are keeping your expenses within a reasonable level in order to achieve profits.
No entrepreneur should go into business without knowing the best definition of profit meaning
As an entrepreneur, you start your new business with hopes and dreams. You nurture your business, you want it to be successful, you have lofty goals and you do everything you can to achieve them. You swear you’ll be the best.
But do you know your business numbers?
Sounds boring or maybe intimidating, but every successful business owner needs to know their business numbers. Why? Because business is all about numbers.
Have you considered what happens when you make business decisions without knowing how it will impact your bottom line?
What is the best definition of marginal cost? What is the best definition of marginal benefit?
Do not go into business blindly and not understand how your decisions affect the profitability of your business. The reason entrepreneurs go into business is to make money, so if you are not tracking the money you are making, or even know if your business is generating a profit, it defeats the purpose of being in business.
The top ways knowing your numbers will help your business:
- You will have a financial plan
Having a financial plan is important as it gives your business direction. You can set goals such as revenue targets and monitor your progress against these goals throughout the year. You can also set profit margin goals to ensure the profitability of your business. You’ll want to do this to ensure the expenses in your business aren’t so inflated that you aren’t making any profit.
- You can identify issues before they become bigger problems
When you monitor your business throughout the year you can see issues forming that can potentially become bigger problems and cost you a lot of money. But because you are monitoring your numbers, and you know your numbers, you will see this issue before it becomes a huge money suck and make adjustments to course correct. This actually ends up saving you a lot of money as you prevented a financial loss from occurring.
U.S. Small Business Administration states that “Looking closely at money-in and money-out helps maintain a sustainable balance between profit and loss.”
- You will understand how each decision you make as a business owner affects your bottom line
Because you understand your business numbers, you will have a solid understanding of how your business decisions will affect the profitability of your business. You can make confident business decisions knowing that these decisions will increase the profit line in your business.
- Knowing your numbers will keep you in business for the long term
When you know your numbers and your business is profitable, it will keep you in business for many years to come. More importantly, it will be making you money for many years to come.
The main reason businesses do not succeed in the first five years and close their doors is due to a lack of profitability and financial mismanagement. Understand the difference between revenue and profit.
When you are the CEO of your business you are likely taking on the roles of many because you can’t afford to hire all the professionals. You’re likely the sales manager, marketer, operations manager, customer relations…. but don’t forget to include the finance manager in those roles.
Investing in this skill now will not only pay off now, but this skill will carry your business into the growth stage, and when you can afford to hire financial help, you will always need to be involved in the numbers and decision-making.
