Being a business owner and a numbers girl, I couldn’t help but sound off on what seems to be growing confusion about what profits are and what it means to be profitable. According to the Small Business Administration, one of the top reasons small businesses fail is due to poor accounting, which means they’re not tracking and monitoring the numbers. Even if you are tracking this information, let’s clear the air and discuss what profits are not.
Profits are not sales.
Profits are not revenue.
Profits are not cash flow.
Don’t get me wrong. You need sales to generate revenue and revenue to generate profit. But they are not the same. As business owners, here’s the thing to understand, a $20,000 sale in one month doesn’t equal $20,000 in revenue that same month unless the client paid the entire amount during that same time period. And in those cases where the client received a discount, the sales amount and revenue wouldn’t equal.
So what is profit? And what does it mean to be profitable?
Profit, according to Investopedia, is defined as a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business.
Total Revenue – Total Expense = Profit
When you’re profitable, that means you’re in “the black”, and have access to more resources and opportunities to continue growing your business. In other words, you have more choices.
Truth is profit equals total revenue less total expense.
If you want to discuss what you can do to accelerate your profits and create a profit plan – not just an action plan for your business, then let’s talk. Reserve your complimentary strategy session here: www.ConnectWithShontaye.com. Limited slots available this week only.