Sifting Through the Numbers to What Really Matters
I have seen an influx of posts like these in many Facebook groups. Others flock to the post commenting wanting to know how. Me, I shake my head. Just because a company has $100,000 in sales doesn’t mean the owner is keeping that money. There is so much more to a business than how much money it generates in revenue.
Some questions to consider:
How long did it take to achieve that dollar amount?
How much time did you invest to achieve that dollar amount? Let’s face it, time is money.
And the biggy, how much did you invest/spend to achieve that dollar amount?
Answers to these questions help us determine net profit and profit margin. These numbers tell us more about a business than just looking at revenue alone.
Company A made $100,000 for the year.
They spent $50,000 on wages and subcontractors
$10,000 on coaching
$5,000 on advertising and marketing.
Their net income is $35,000
Company B made $50,000
They incurred $15,000 in expenses
Their net income is also $35,000
In simplified terms, both companies were left with the same amount of money after paying their expenses. Both are profitable.
To determine their profit margin we divide their net income by their revenue.
Company A has a profit margin of 35%
Company B has a profit margin of 70%
This number gives us an idea of how well a company is handling its finances. It reflects the percentage of each revenue dollar retained as profit after paying expenses. So company B retained 70 cents for each dollar spent whereas company A kept only 35 cents for each dollar spent.
Both companies have the same net income and very different profit margins. You don’t need a business that generates a specific number of digits in revenue, you need a business that has a steady flow of income, low overhead, and systems in place to ensure it is well managed. This is not to say anything against growing your revenue, hell no. Just be smart about it.
If you are a small business owner or desire to be one, do not get sucked into the 6 figure hype. Instead: focus on these things: increasing money coming in, keeping expenses low, and tracking the flow of your cash so you can pay those expenses in a timely manner.
Need help with these tasks? Schedule a call and we can chat.