Note: This blog post is written based on the way many people look at business finances. Those who have not yet implemented the teachings in Profit First.
Moment of truth: how much money are you actually making in your business?
How much of that is actually PROFIT?
If you’re like a lot of busy entrepreneurs, you probably look at your statement every month, add up the amount you invoiced, look at your Paypal balance, or otherwise look at how much money your business made.
Do you like that number? I hope so, but there’s a lot more to unpack here.
You see a total amount there, but that’s only half the story. In order to figure out how much you’re really making, you need to understand the difference between REVENUE and PROFITS. And to do that, you need to be just as clear about your expenses as you are about the actual cashflow.
Revenue vs Profits
There’s a difference between revenue and profits, and too many business owners (even EXPERIENCED business owners) don’t pay enough attention to profits.
Here’s a quick vocab refresher:
Revenue is the total amount of money your business brings in.
That’s the amount you invoice for each month, the amount you rack up in sales, the amount you see in your account.
Profit is what you have left over after your taxes and operating expenses.
Profit is what you have after…
…transactional expenses (like Paypal fees)
…income taxes (you set aside money for those, right?)
…sales tax where applicable (you set this aside too, right?!)
…paying your staff and contractors
…fees for your email service provider, social media scheduler, and other regular services.
…anything else you reinvest into the business.
And after you pay all THAT, you pay yourself. (Unless you have read and implemented Profit First, which I highly recommend! Read my review here.).
Revenue is important, but I want you to look at PROFITS.
To figure out your profits, look at what you made last month (or last year) and subtract all your expenses including taxes, payroll, etc.
What do you have left over? That number is your profits, which you can use to pay yourself or save/reinvest into the business.
What do you think of that number now?
If you want to take this further, divide that amount by the number of hours you worked in that time period. What’s your hourly take-home? How do you feel about that number?
This is eye-opening for a lot of people, and it might be really uncomfortable. But it’s important because we can’t improve what we don’t measure.
How to Increase Your Profits
If you’re like a lot of business owners, you might feel like a deflated balloon right about now. I get it. It can be really sobering to see how much money you’re ACTUALLY making.
So what do you do if your profit is a sad little number that makes you want to go get a job at the Chipotle down the street?
Here are a few things you can do to raise that number:
1- Audit your expenses.
Take a close look at each and every one of your expenses and ask yourself whether you actually NEED that expense or, in the case of something like taxes, how you can reduce that expense. Is that service actually making you money? Is it saving you a significant amount of time?
Also, are there any tax deductions you’ve overlooked? (You might want to talk to an accountant about this one.) Make sure you’re considering coffee shop visits when you go there to work, gas, home office (if applicable), your Internet bill, supplies ,and software you buy for your business, etc. You might even be able to write off your phone bill if you use your phone for business!
2- Raise your prices
Many new (and even veteran) business owners fall into the trap of charging too little for products and services, though they don’t realize it at first because they aren’t taking their expenses into account.
If your hourly take home pay is pitiful, it may well be an indication that it is time to raise your prices. Take a look around at competitors. Where do your prices fall in the market?
3- Make more money
This might seem obvious, but if you want to bring in more profits, you need to think of ways to make more money. We already talked about raising your prices, but there might be other ways you can make more money without actually working more.
You might want to consider hiring a VA or other professional to take some tasks off your plate so you can spend more time working with clients or creating products or services that will benefit your audience, because those activities actually make you money!
You can also take a close look at how you’re spending your time. Track your business activities for a few days or take a few minutes to think about what you do every day. Now, connect those tasks with money. Which activities actually bring in more money? Which tasks are time wasters that make you “feel” busy, allowing you to stay safe?
You might find that you get lots of new customers and list signups from your podcast, but maybe your Twitter account isn’t getting much action. Or maybe guest posting is bringing in lots of new business, but blogging every week doesn’t seem to increase your conversion rates.
If you notice that some activities are translating to more income than others, work to reduce or eliminate less-profitable activities. That way, you can spend more time on the tasks that actually do make money!
To take a full inventory of your business and find out where you’re losing time and money, grab your free guide to find (and stop) the leaks in your business!