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Revenue, Profits, and Profitability - It’s Not Enough to Cover Expenses

Category: business strategy

Written by: Kade Wilcox

Posted on: February 25, 2019

My father-in-law is a saddlemaker. All of my childhood memories are intertwined with his work. The first dollar I ever earned was made by sweeping the leather shavings off his floor, and I spent many summers with blistered hands as I sewed stirrups to earn shopping money. As I got older, I had the chance to see other sides of owning your own business. One of my new jobs was helping to pay the bills. I could ask my dad anything about his business and he could answer it without even looking: what did he pay for leather each month? How much had shipping costs increased this year? How much did he have saved for emergencies?

While my dad never set out to build an empire, his example is a worthy one. He knew and practiced something that a lot of business owners struggle to with: he knew the finances of his business in and out and he cared just as much about his profitability as he did his revenue.

What is Gross Revenue

When you’re responsible for growing a business, it’s easy (and understandable) to spend a lot of your time thinking about sales. That’s how you generate the income you need to keep your business running. This number is known as gross revenue: the sum of all money generated before deducting expenses. (For a thorough definition of gross revenue, check out this helpful article.)

Gross revenue is important to note because it’s a great indicator of how well your business can sell. It’s not, however, an indicator of whether or not your business is actually making money.

What is Profitability?

As the leader of your business, you’ve got to be paying attention to gross revenue, as well as your expenses and your profitability. You’re already looking at your expenses in order to keep your profit as high as possible, but does that mean your business is actually profitable?

Profitability is the metric used to determine how likely a business is to consistently yield profit or financial gain. While it’s a very good thing that your business is making a profit today, you also want to be sure your business can sustain that profit for the long haul: have you priced your product or service correctly? Are you consistently generating new income? Have you kept your expenses as low as possible? Have you calculated the cost of staying in business for the next 5, 10, or 15 years?

Why Profitability Matters

Why-Profitability-MattersWhether you’re making saddles or building a franchise, it’s not enough for your business to just cover your expenses. You have to be poised for healthy growth. When your business is profitable, you and your entire team benefit, as well as your customers. Here are just a few of those benefits:

  • Clear-cut decision making. When you know your finances in and out, it’s easier to make sacrificial choices that will have long-term gains for your team and your business.
  • Freedom to dream. When you’re profitable, you have the freedom to actually think about growth and how you want your business to evolve and change.
  • Greater security. Part of becoming profitable is ensuring you have cash set aside for emergencies.
  • Sufficient funds to invest in your team. When your business is healthy and profitable, you’re able to hire the talent you need and provide benefits that care for your team well.
  • The possibility of growth. Whether you are looking to expand your business through acquisition or looking to be acquired by another company, profitability matters.
  • Freedom to stay in your lanes. When your business isn’t profitable, it’s going to be a mental and emotional weight on you. And it’s going to affect every aspect of your life.

As a business owner or CEO, you’ve got a lot on your plate. One of the best ways to make sure you maintain the right priorities and focus is by working with a coach. We’ve had the chance to learn from our own experience and work with dozens of businesses. Interested in learning how we could partner with you? Set up a time to meet with us below!

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