Making more profit is NOT the same as generating more revenue.
They are two completely different areas, and something that I see very little discussion on.
Sure, I see LOTS of talk about revenues, i.e. six-figure businesses, multi-six-figure businesses, seven-figure businesses, but you never seem to get to the real story behind these headlines – how much profits are they really making? How much of the $100k does the business owner actually get to keep once expenses are paid — that’s the profit!
A six- or even seven-figure business sounds great, but it’s not so great if the profits aren’t there, i.e. you’re only making a $10k profit from a $100k business.
Profits are basically what’s left over (pre-tax or gross) after a business’ expenses have been deducted from its revenues – and this is one area of business that you need to keep a close eye on. So, taking two different scenarios, let’s look at some simple math in determining the profits of a six-figure business and a smaller five-figure business:
Business A – revenue = $125k p.a. with business expenses at $85k. Gross profit (before tax) = $40k or 32% of revenues.
Business B – revenue = $50k p.a. with business expenses at $14k p.a. Gross profit (before tax) = $36k or 72% of revenues.
Which business would you prefer to be the owner of? Obviously Business B because even though the revenues are lower, the profits are much higher, so Business owner B has a handle on their business expenses and is generating a very healthy profit in their business. And this means that when they scale-up their business, they’ll actually be generating a much higher profit.
In order to know if your business is going to make a profit in the current year you need to carefully watch your revenues (income) and expenses. One of the ways I do this (in fact it plays a major role in my business) is to produce a monthly Cash Flow Projection report that gives me the big picture for the year.
Put simply, a Cash Flow Projection shows whether your anticipated income will be able to cover your expected (projected) expenses and this report is very beneficial to you in your business. It is an annual report and, if set up correctly, will show you how cash will flow through your business throughout the current financial year.
You’ll need to keep a close eye on three main areas of your business expenses in order to ensure healthy profits:
1. Essential Business Services – these would be the things such as your shopping cart provider, your merchant account etc. In fact any service that is essential for the running of your business. Without this service your business could not operate. If you purchase any other business services determine how they are adding to your bottom line – is it worth continuing with them?
2. Advertising/Marketing Streams – where do you currently advertise your business and how much is it costing you? Is the return on investment worth it? To track this you need to know exactly where your clients and customers are coming from. One way to do this is to use ad trackers so that you know exactly how effective each advert is; how many leads it’s converting (people who sign up to your list); and how many sales it’s generating. Then you can make an informed decision about whether to carry on with this advertising stream, withdraw from it, or even increase your investment in this advertising stream.
3. Business Development – in order to grow your business you need to grow yourself and this means investing in your learning. Carefully look at all the products and programs you’ve purchased and analyze what the results were for you. How did your investment in this product or program directly grow your business? Did you learn something new that you were able to pass along to your clients in your teachings? Where are your skillset gaps? Do you need to work with a mentor or coach to grow your business again this year?
So, in summary, if you want to ensure a healthy profit in your business you’ll need to track your expenses against your revenues; implement an annual Cash Flow Projection report and update it monthly; and keep a close eye on your business expenses.