33. Why Does Profit Matter?

Recently, I was talking to someone, and they asked me why profit mattered. 

I'll admit, was taken aback a bit. I felt like they were asking me why I needed to breath. It seemed so obvious to me.  

Businesses need profit to survive over the long-term. And business owners need profit if they want financial freedom or just to support their lifestyle.  
 
But profit is actually discussed very little in marketing you will see aimed at your business. Most strategists, business coaches, and consultants are focused on revenue.  Very few are discussing profit.

And profit, more than revenue, is what really matters in determining if your business is financially healthy.

So it's no wonder the question gets asked. If no one is really talking about, does it really matter?

Hell yeah!

Profit funds investments that help you scale your business. 

Profit creates generational wealth.

Profit provides money to invest in real estate.

Profit pays for college educations.

For private school for your special needs child.

It allows your spouse to retire. 

To pay off your parents' mortgage.

To take that 1 month trip to Europe you've dreamed of.

Profit helps create that life you dreamed of when you started your business.

🎧 Tune into this week's episode and learn:

• Why revenue isn’t the best measure of your business’s financial health and what to use instead
• What entrepreneurial poverty is 
• 3 actionable steps you can take to improve your profitability

Mentioned in this episode:

• Want to create more profit in your business. This is what I help clients do in my Purposeful Profit financial coaching and mentoring program. Book a call to continue the conversation.

Other resources:

• S Corp Tax Savings Calculator
• Get your Simple Financials Bookkeeping template
• Get Your 30 Days of Money Mindset Prompts

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Welcome to Purposeful Profit, where I help you take your business to the next level. I'm Carla Moats, finance strategy coach and fractional CFO for high achieving female entrepreneurs. I'm here to empower women to build wildly profitable businesses, and give them the freedom to live their dream lives. I'll use my more than 30 years of finance and consulting experience to take the mystery out of your finances, help you make more money, and go after your next big thing.

Welcome back to the Purposeful Profit podcast. I'm your host, Carla Moats. And I am a financial mentor and coach and a financial whisper to female founders. My mission is to help you get your finances in order and put more profit in your pocket. In the business coaching and consulting world, most of the conversation is around revenue. So the next time you're on Instagram or LinkedIn, go look at the feed for 10 random business coaches, strategists, marketing consultants, and you'll see claims around 10k months, 20k months, 10 times your revenue, etc. One thing you'll notice is that there is very little talk about profit. Profit is what's left after your expenses. It's the percentage of each revenue dollar that you keep. And a main reason this podcast exists is to change that. I want to create and normalize discussions around profit, because the amount of money you keep is really the most important thing as you're building a business, particularly a lifestyle business. 

I was talking to someone the other day and they asked me, “Carla, why does profit matter?” “Why is it important?” And I actually had to take a deep breath because as a finance person, I felt like they just asked me to explain why we need oxygen. I mean to me, wasn't it obvious? Profit is to business what oxygen is to us as humans, businesses need it to survive. As humans, we can die if we are deprived of oxygen. And similarly your business will die if it's deprived of profit over our long term. 

So in today's episode, you're going to learn why revenue isn't the best measure of your business's financial health, and what to use instead, what entrepreneurial poverty is and you'll learn three actionable steps you can take today and to improve your profitability. 

I want to get clear: revenue is important. I'm not saying revenue is not important. There's no doubt, you need to have revenue to have profit. The accounting equation for profit is revenue minus expenses equals profit. So it starts with revenue, there is no doubt and creating an offer and converting that into revenue is the first real skill you need for a sustainable business. If you don't have an offer, you can sell it, or you have an offer and you can't sell it and you can't create revenue, you're never really going to have a business. But being good at making revenue doesn't necessarily mean you're good at keeping it. And a lot of the business owners out there that you see that are talking about the six figures that are greater than multi six figures, even that million dollars that are created, they are not keeping a lot of it or not keeping enough to live their life. 

There is a lot of entrepreneurial poverty out there. Entrepreneurial poverty is where the business owners struggle to generate enough money to meet their personal needs, that is to live the lifestyle they want. So entrepreneurial poverty will be different things to different people. If your goal is to just run your business as a side business and say, fund your kids college education, entrepreneurial poverty would be your inability to achieve that goal with your business. But maybe your goal is to completely be full time in your business, and live a certain lifestyle. Entrepreneurial poverty is the inability for your business to generate that. So it's going to vary from person to person. But just because somebody tells you that they're making six figures, or multi six figures, or even a million dollars, they're not taking that amount of money home. So just keep that in mind when you see these revenue claims that are out there. The next time someone tells you how much they made, ask them how much of that they actually kept. 

And keep in mind that 75% of American small businesses earn a profit of less than 75k a year. And if you are a woman business owner, that percentage is even higher. Have you ever heard the saying “what got you here won't get you there”? And in the case of finance, what that means is the skills that got you to six figures or multi six figures in revenue are not the same skills that will get you to keep multi six figures or to build a business that creates a profitable business or scale up to a million dollars. So if you don't learn how to keep money, you're going to end up in what I call the revenue hamster wheel.

The revenue hamster wheel is where you're chasing more and more revenue, spending more and more time. The problem is if you can't keep money at 200k and when I say keep money, it's what's that percentage of that 200k that you're going to keep - you're going have even more trouble at a million dollars because as you scale up, what will happen if your expenses will grow as well. And while you might be making a million dollars, you might actually be less profitable. So the bottom line is you have to care about revenue, at least as much as profit. I’m not saying to not track your revenue or not to care about revenue goals. All my clients, I want them to set a revenue goal because your profit dollars start there. But I want you to start caring about profit and being as passionate about profit, as focused on profit as you are on revenue. 

Just in case you don't know the equation, again, for profit is I have my revenue, which is my sales that come in, and then I have all my expenses that I pay out. Profit is what's left. And in this case, we're talking profit before taxes. This is before you've paid your taxes. And your profit margin, which is the measure I like even better is that profit divided by your revenue. It's a measure of how much of every dollar you keep. And so your profit dollars are expressed as revenue minus expenses equals profit. And that's my profit dollars. Your profit margin is expressed as a percentage, it's that profit divided by your revenue. 

If you want financial freedom, if you want to generate funds to have a business that funds the lifestyle you want, your profit and your owner’s pay are much more important measures of financial health than your revenue. Those two measures are what's really going to drive whether or not you're able to realize your lifestyle goals. 

So we're going go back and answer that question I was asked the other day, why does profit matter? And again, to me being in finance, I have spent over 30 years in finance organizations where profit, it was either given or it was something we were trying to achieve. I didn't really think about, you know, well, why is it important? But for those of you who are versed in finance, this may be a legitimate question you have out there. 

Well, first of all, it's a measure of the efficiency of your business, a higher revenue number that is burdened with heavy expenses isn't sustainable in the long term. So I want you to think about two businesses. One business has a revenue of $500,000. So it's a nice revenue number, and they have a profit of 100k. So that is a 20% margin. Or I could have a 250k business with a profit of 150. Which of those businesses do you want? If I'm building a lifestyle business, I want the second business, I want the 150k, and profit, which one of those is more efficient in using the resources? Definitely the second business. 

The second thing is a profitable business is more resilient to downturns in the economy, go back and look at small businesses during COVID. And how many had to shut down? A profitable business improves your likelihood that you can continue to operate and grow over time. And there is a relationship between profit and cash flow. From an accounting perspective, profit and cash flow are two different things. But lifestyle businesses are 95% cash basis businesses, in which case your profit and cash flow are very close to the same. The only real difference is if you are not an S corp, and you are taking an owner's draw or any type of vote or draw. That's not an expense of your business. But it does affect your cash flow. But that's really the only difference. And I find with lifestyle businesses in particular, there's a very direct link between profit and cash flow, I can tell you nine times out of 10 If a client comes to me and they have profit issues, they also have cashflow issues. If they have cashflow issues, they also have profit issues. 

Third thing profit does is it enables growth and reinvestment in the business. This is what people are most probably familiar with. You take profit and you reinvest it in your business. It allows you to hire new employees, build your team, expand your offerings, invest in new technology, or automation. And particularly as you scale this is important, because as you scale you're probably building out a team, you're maybe adding new revenue streams, you're maybe doing some automation and profit gives you funds to invest in that. If you don't have any profit, you're not building any type of cash reserves, you don't have funds available to make those investments. 

And then one of the things that really is the most important thing is the profit rewards the owners. Profit is what makes working in your business different than working in a business owned by someone else. So when I worked for corporate, I had one source of income, I had my W2 salary. Yeah, I might have gotten bonuses. So you know, maybe there were two pieces, but they were all part of my compensation package. But I didn't have a share of the profits of the business. As a business owner, you're going to get paid for your work in the business, which we could do a whole other podcast about that making sure you're paying yourself for the work in the business. But you're also getting profit, and profit provides a distribution to the owner. So what I like to do with my clients is we actually set aside the profit, we set it aside into a separate account, and then every quarter, we're going pay out half of it, the amount we pay out is going vary depending on the client's goals, but it could be a third, it could be a half if they're paying down debt. It might be actually used to pay down debt, but they're going to put part of that profit back into the business typically, and they're going to take part of that profit out to them as a distribution to themselves for some goals that they have lifestyle goals, goals to travel, retirement goals, goals to invest in passive income properties like rental income. 

Understand this: profit is the creator of wealth and lifestyle freedom if your goal is to create generational wealth, if your goal is to invest in other businesses, if your goal goal is to invest in real estate, create investment properties. Profit is your vehicle for doing that. 

So I'm going leave you today with three action steps you can take to improve your profitability. 

The first one is really about intention, focus on that profit margin, not just on revenue. Look for ways to reduce your costs, negotiate better deals with vendors, or suppliers. So I'm actually in the process of doing this within my own business, I have a service that I was outsourcing, I basically decided that I'm going to take that service and I'm actually going to parse it down into smaller pieces. And I think at the end of the day, I'm going get a lot more bang for my buck. I recently eliminated use of some software I was using that I wanted to test out last year, but I've decided it is wrong, not giving me what I want out of it. So I just continue to look for expenses, you no longer need. Look for better deals with vendors. Look for ways you can increase efficiency in your operations. A lot of this is through automation. A small increase in your profit margin can have a big impact on your bottom line. 

And part of focusing on your profit margin is also setting profit goals which kind of leads us into implementing a profit first system. Profit First involves allocating a percentage of your revenue to profit before paying expenses. I mentioned earlier that the typical accounting equation is revenue minus expenses equals profit. Well, what Profit First does is it says revenue minus profit equals expenses. So you're going to take your revenue dollars, you're going say this is how much is for owners pay this is how much is for tax, this is how much is for profit. And what is left is my expenses. And that becomes your expense budget, and then you create a spending plan for that expense budget. This process ensures that you prioritize profit, that you don't overburden your business with expenses that it really can't sustain, I see that a lot of times in clients, even 500-600k, or even a million dollars, they're making a lot of revenue, that their business has more expenses than their business can really sustain. 

And then third, review and adjust your pricing. Pricing plays a crucial role in your profitability. Regularly review your pricing strategy, make sure it reflects the value and covers your costs, including the cost of your time. So a lot of you if you're doing a one on one model, think about what is your time worth. ome that replaces this? How much do other people charge? How much do I want to be paid an hour, But don't be afraid to adjust your prices to increase your profit margin. Businesses that really focus on profit margin will get really detailed and understand what it costs them to deliver those services. And when they see those margins eroding, they will go look at their pricing to see if their pricing needs to be adjusted. 

So I hope this podcast helped you today. Like I said, I really want to create a discussion where we normalize talking about profit the same way we talk about revenue. And if you want to help improve your profitability, this podcast is just the beginning of that conversation. This is the work I do with my clients and our mentoring and coaching program. I invite you to book a free call at WWW dot Carla moats.com forward slash work with me and we can continue the conversation. Thanks for being here. And I will see you next week.

Thanks so much for listening to the show. Remember that your finances deserve some love. Finance doesn't have to be complicated or overwhelming, and you do not have to do it alone. I'd love to talk to you about your business. So please come on over to www dot Carla moats.com to learn more. Or if you're ready for financial and strategy support that will uplevel your business. Go to www dot Carla moats.com forward slash work with me to book your free financial assessment. And the last favor I'll ask is for you to help me get up the word. Tell your friends about this podcast and share it on your favorite social media. Until next week, go create some Purposeful Profit