What Is Profit Really?

Profit is not your revenue. Your revenue is truly your revenue. That is the total amount of income that you brought in from all of your income sources over a determined period of time.

Profit is not your cash balance or bank balance. We can’t look at our bank balance and say, “This is how much profit we’ve made for a year.” Profit accrues on a weekly and monthly basis, and your bank balance is truly just the cash you have available right now.

Profit is not the number you see at the end of the year on your Profit and Loss sheet. And this is typically where I lose people. I am a bookkeeper as well as a CFO, and I show my clients a Profit and Loss statement. And at the end, it says, “Net Profit,” and I’m smiling because that is what we think profit is. And the reality is—that’s not it.

Profit is also not an event. A lot of times we’ll pick a project for the year and think it’s going to be our most profitable project. Or we’ll introduce a new service and think it’s going to be profitable. 

Profit should be baked into everything you do in your business. It’s not just from your services and sales. You should be thinking about how you can streamline your processes to be more profitable, how you can adjust your marketing to hit your target audience so you’re getting more profitable clients, how you can change your tax strategy so you're keeping more of your profits. It’s not a one and done thing. 

As a principle, profit is the lifeblood to grow a sustainable business that you don’t resent. That's what it’s about. Most of us started businesses because we wanted time freedom and to make an impact. Without profit, you will not be able to keep your business alive long enough to make the impact you want and enjoy the time freedom. 

As a calculation, profit is the money left over after you have paid all your business expenses, paid your liabilities, paid yourself, and paid taxes. That is what a true bottom line profit for a business is.

And if you’re shocked, I bet it’s because you’ve gone to your tax preparer or your accountant at the end of the year and heard something like, “Hey, great year. You’ve had a super profitable year.” And meanwhile you're in the chair thinking, “I’ve barely made payroll multiple times this  year. I didn’t pay myself for over half the year. I took on debt for investments. And my bank balance is so bad right now.” That doesn’t sound like a profitable year does it? 

The trick is that the profit your accountant is calculating and the true bottom line profit for you as a business owner are two totally different things. And I want to give you a super quick example.

Your CPA is taking your revenue, all the income in your business, and is simply subtracting your expenses. That does not include liabilities. If you’re not an S-Corp, it doesn’t include your pay because you're doing owner’s draws. And it doesn’t include your tax payments.

So if you brought in $675,000 in revenue and you had $375,000 in cost of goods and operating expenses, your CPA say,  “Good job. You had $300,000 in profit!” But let’s look at the true picture. 

Let’s say you had $675,000 in revenue and $375,000 spent in cost of goods and operating expenses. You also paid $100,000 to your loans and credit cards. You paid $175,000 in taxes. And you paid yourself $150,000. With those additional loans, taxes, and your pay, you’ve added $425,000. 

You are actually $125,000 in the negative! And that is probably why you had to take those loans and credit cards out! 

So instead of thinking about profit as a simple formula, a simple calculation of revenue minus expenses, I want you to start thinking about it as a much bigger picture. Understanding profit is the most important financial factor to a business owner because this number can help you understand how much revenue you actually need to bring in so you can reach your goals and your dreams for your business. 

I hope you’ll start thinking about profit as a true bottom line number, not just that Profit and Loss bottom line. Go ask your bookkeeper to pull some numbers from your balance sheet—your liabilities, your owner’s pay, and your estimated taxes. Ask them to do that simple calculation for you every time they talk to you, and you're going to start seeing that your Profit and Loss sheet number is much lower than what your true profitability is. 

I have a challenge for you—I want you to do that exact thing. I want you to find what your true profitable number is for this year. If that number is not positive or not high enough, message me today. I want to help you build a more profitable business.