Entrepreneurs have a lot on their plates. From hiring to marketing and everything in between, their lives are hectic. It’s easy to take your eye off the ball as an entrepreneur and neglect managing the business end of your business in favor of customer service or focusing on your product or service. It’s also easy to lose track of the metrics that really matter when it comes to determining the success of your venture. Some entrepreneurs focus on revenue, which is a vanity metric, instead of the accurate measure of profit. Here’s the difference between the two and how you can manage for-profit to catapult your success.
The Difference Between Profit and Revenue
The first step toward managing for profit rather than revenue is to understand the difference between the two. While revenue is the total amount of income you generate from the sale of your goods and services, profit is the bottom line. You calculate profit by determining the amount of income that is left after you account for all your expenses, operating costs, debts, and additional income streams. If you’re on track with your finances, you should be able to easily determine profits on a regular basis.
Many entrepreneurs judge their success based on revenue. This is especially dangerous during the early stages of a business when start-up and marketing costs are extremely high. No matter how high your revenue is, if your costs are higher, you’ll never turn a profit.
How to Increase Profit
There are two parts to profit: money coming in and money going out. You need to have your eye on both metrics at all times and make adjustments accordingly to increase your profit.
Increasing sales is the obvious way to increase profit. You can increase sales through hiring a new salesperson, increasing or streamlining your marketing strategy, entering new markets, amping up your networking, or creating an online course or other offerings that generate a new revenue stream. However, keep in mind that some of these strategies also include higher costs. For example, if you hire a new salesperson at $50,000 per year and he only generates $40,000 a year in new sales, you’ve actually decreased your annual profits by $10,000.
Reducing costs can be done in a variety of ways. You can reduce or consolidate staff, outsource some of your services, put in money-saving systems or processes, automate, or reduce bills such as rent for a traditional office space. The key is to make sure your cost-reducing methods are not damaging your business. For example, reducing staff could have an impact on your customer service and moving from a traditional office to a remote one could negatively affect employee morale or communication.
Keep an Eye on Cashflow
If you have cash flow issues, it’s possible for your business to be turning a profit yet still not have enough cash on hand to pay bills or take care of other necessary expenses. Cash flow is the term for the timing of when you receive payments and when you pay expenses. It doesn’t matter if you show a net profit if you don’t actually have the money in your business bank account. Slow or non-paying clients are usually the main source of cashflow issues. If you find you regularly have a low or negative balance in your account even though you’re profitable, focusing on new accounts receivable methods should be high on your to-do list.
As the economy ramps back up, it’s vital that entrepreneurs understand how to manage their business for profit and put methods into place to maximize growth. Want to learn more about how to effectively manage for profit as an entrepreneur? Consider our Learn the Language of Money online course. As always, comments and questions are welcome!