One of the most important goals to focus on in your business is how profitable your business is, rather than how much revenue it produces. As the saying goes, “It’s not how much you make, it’s what you keep.”
Cement that adage into your psyche and let it guide your business decisions moving forward. When the time comes to determine if you’re going to hire employees, upgrade your systems, or expand your product line, the choice should be made based on whether or not it will increase your profitability.
Don’t make the mistake of thinking that just because your business is generating revenue your business is successful.
Profit vs Revenue — Which Metric Matters Most?
Revenue, also referred to as the top line is the total income that your business generates through the sale of products and services.
Visualize your total sales (or revenue) listed at the top of your income statement. As you work your way down, your expenses chip away at that total sales number. When everything is accounted for, you’re left with your profit.
Profit is referred to as the bottom line because that is the money that is left at the bottom of your income statement after accounting for all expenses, debts, additional income streams, and operating costs.
Paying yourself out of your profits should be a priority, but the way you go about doing it may be challenging at first. If your business is new you’ll have to figure out how much to reinvest in the business and how much to pay yourself depending on your goals. More established business owners will enjoy more consistent cash flow, making it easier to predict how much profit you’ll generate and how best to allocate it.
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For entrepreneurs who want a better understanding of the financial side of their business without spending hours going down a google rabbit hole just to surface feeling confused, stressed & overwhelmed. If you're a small business owner who has ever worried that you're living beyond your means or felt unsure of how much you can spend, you need this guide.
The strategies in this guide are based on the success I've seen with my clients. When you adjust your mindset and understand the financial side of your business, you're going to stress less and spend with ease!
Increasing Revenue Doesn’t Necessarily Increase Profitability
People make the mistake of putting too much weight on how much money they bring in. Celebrating the revenue that your business generates delivers the same dopamine hit you get from likes on social media posts. It’s a vanity metric — it makes you feel good, but it isn’t always an indicator of true success.
Now don’t get me wrong, there’s nothing wrong with aiming for 10k, 20k, or 30k and above months. Most of us have financial milestones that we aspire to hit — it’s a big part of why we started our businesses. But don’t forget to take into account how much your expenses will impact that number.
Making the jump from 20k to 30k, or whatever the next benchmark may be, often comes with increased expenses. The ad spends, marketing consultants, and full-time employees you’ll need to bring on board to help you nail that 30k month will add up and eat into your profits. Without organizational efficiency and proper planning, increased revenue can be costly.
If you train yourself to think about profit first, then you’ll be better positioned to streamline your expenditures, control your cash flow, and maximize profits along the way.
Keep Spending Down to Drive Profitability
If you know your numbers, you’ll quickly identify when unnecessary expenses start snowballing out of control. Expensive equipment, software or subscriptions, and trendy office spaces will be enticing, but will they drive the bottom line higher?
When you’re focused on profitability, it’s easier to exercise restraint. Your mind will be trained to see that your earnings may suffer and the increased expenses won’t result in greater profits.
There’s a phenomenon called lifestyle creep which happens when increased income leads to increased discretionary spending. This is usually about individuals who experience an increase in earnings and feel compelled to upgrade their lifestyle.
But it’s equally applicable to businesses. Making more money is exciting, but it tends to make people then spend more money either personally or professionally if they’re not conscious of it. A profit-first mindset can help you prevent the desire to increase your expenses unnecessarily as revenue increases.
It's time to learn how to manage your cash flow like a pro!
Download your free guide to get started! - download HERE
This guide includes regular tasks to build into your workflow to ensure you don't run out of cash, tips on how to create and keep a budget, and the best apps to use to track expenses seamlessly. With this guide, you'll feel confident in managing your cash flow and might even be checking your bank balance daily!
Prioritizing Profit Over Revenue
One of my favourite tools for managing your finances and prioritizing profitability in your business is to set up multiple bank accounts. At a minimum, open an account for operating expenses, an account to save for taxes, and an account to save your business profits. The separate accounts will help make it very clear how much your expenses are costing you, how much you’re paying in taxes, and how much profit your business is actually producing.
Also read: Guide to mastering the Profit First method
Depending on the structure of your business and how you pay yourself, you’ll likely be paying yourself from the profits account, at least in the early stages of your business. Paying yourself is incredibly important. All too often, small business owners sacrifice themselves for the “hopeful” growth of their business.
Foregoing your own paycheck for a month or two in order to reinvest in the business may seem like the right thing to do, but far too often that month or two turns into six and beyond. If you are running a business for free, then you aren’t running a business at all.
The book I often recommend to my clients is Profit First by Mike Michalowicz. In the book, he writes, “Profit must be baked into your business. Every day, every transaction, and every moment. Profit is not an event, profit is a habit.”
As the owner, you set the tone for your business. Success is a byproduct of your systems, habits, and mindset. Your business can bring an enormous amount of personal fulfilment as well as financial stability. Maintaining a profit-first mindset will set you up for long-term success and sustainable growth. Continue to ask yourself, “Will this help or hurt my bottom line?” With that question as your guiding light, you’re well on your way to building the kind of profitability that will keep you in business for the long term.
This checklist walks entrepreneurs through the three stages of business growth to help you maximize your Return on Investment (of TIME, ENERGY, and yes MONEY) - this guide is only for service based businesses.
Most of us are bootstrapping our businesses - using our own money to get started vs taking on significant debt or investment. Most of us need our businesses to support our lifestyle - paying us a steady paycheck equivalent to any other professional salary within the first couple of years being in business.
Tired of spinning your wheels, unsure of what to focus on next to grow your business, then this checklist and guide is just for you!
This checklist will help determine your right next steps, for where you are in your business.
Continue Building Profitability In Your Business With HM Accounting
At HM Accounting, we know the importance of profitability in your business and are here to help you maximize it. Helping small business owners optimize their systems, eliminate unnecessary spending, and enjoy long-term success is what we do best. To see how we can help you and your business email me at info@hmaccounting.online or simply schedule a free 30-minute Discovery Call on my calender - schedule here
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