In today’s post, I want to talk about the difference between profit vs. revenue in a business.
As I see it, “profit” and “revenue” are the two most important words in your business.
You need a constant flow of money coming into your business to pay your expenses and provide a profit to live on.
Since nearly 9 of 10 businesses fail, that’s obviously much easier said than done.
Most people think they can just start a business and start earning a profit right away.
I’ve found that nothing is further from the truth.
Most businesses take a few years just to make their first penny of profit.
If you study most of the businesses where you live, you would quickly discover that MOST of them are struggling to make ANY profit at all.
Sure, they might have money coming in from sales (revenue), but that doesn’t mean they are profitable.
Some companies generate millions of dollars per year in revenue and still can’t make even one dollar of profit.
In fact, at any given moment in time, a large percentage of businesses are in survival mode and are thinking about shutting down, merging, or selling.
Don’t believe me?
Just drive through your home town and see how many vacant businesses and buildings there are.
Check to see how many current businesses were there a few years ago.
Chances are, most of the current businesses won’t be around in another five years.
Once again, most businesses fail.
Most businesses lose money month-after-month until they have to shut their doors for good.
Most business owners work twice as hard and earn half as much as they did when they were an employee.
Most entrepreneurs who start a business end up bankrupt, financially destitute, or back as an employee within a few short years.
Why does this happen?
It happens for a lot of reasons.
Competition, divorce, bad location, bad product, lack of marketing skills, poor management, and countless other reasons cause businesses to fail.
But the major reason businesses fail is they don’t have enough revenue and profit.
For most business owners, their major problem is bad cash flow and no profit.
You can’t have profits without revenue.
However, just because you have lots of revenue doesn’t mean you will have any profit.
I once heard that revenue is the number you talk to your friends and competitors about, but profit is the real number that your spouse knows about!
That seems to be a fair statement.
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Anyone can sound like a big shot by talking about revenue.
Anyone can sound successful when they tell you their business did $200k last month.
But when you dig a little deeper you might just find out that they spent $250k to earn that $200k.
If you study some of the big companies on the stock market, you will find some companies that do billions of sales in any given year, yet make very little (if any) profit.
Think about that for a moment.
Billions in revenue with ZERO profit, or a small profit.
That makes my stomach hurt.
If you have a business doing that much money in sales and you still can’t make a profit, you are doing something wrong.
And you should probably be fired.
I’d argue that even if you have a business doing $50k to $500k per year in revenue and you still can’t make a profit, you’re doing something very wrong.
Your job as a business owner is to be profitable.
Profit should always be your top priority.
Yes, you need revenue to make a profit, but what you do with the revenue and what you do to earn the revenue are even more important.
Whether your business is established or brand new, it’s very important that you understand the “revenue” and “profit” in your business.
You see, the numbers never lie.
Study your numbers and you might learn that for every $1 of revenue you have you earn ten cents profit.
And maybe you are doing better than that and you make a profit of twenty cents for every dollar of revenue you generate.
Or maybe you are struggling and it costs you $1.08 to earn $1.00 in revenue.
Whatever the case is for your business, just know what that number is.
That is your starting point, your base line.
Always look for ways to improve that number.
For most big businesses, a good profit margin (net, not gross) is about 3% to 8%.
If you’re doing better than that, you are heading in the right direction.
You need to know your profit margin for your business and you need to know where you stand financially on a daily basis, because if you don’t keep a close eye on the numbers, you won’t be in business in very long.
The most successful business owners I know of eat, breathe and sleep the numbers in their business.
They can tell you where their business stands financially at any given moment in time.
Here is what I suggest you do.
Regardless of what type of business you own, create a profit and loss statement.
You can do this with Quickbooks or Excel or in a general ledger.
At a minimum, update this profit and loss statement every month.
Look for trends.
See what you can improve.
Ask yourself “what can you do to minimize expenses and increase revenue?”
What can you do to have better cash flow?
Be a stickler with your money.
Your business depends upon it.
What are your thoughts?
Leave a comment below to let me know what you think.