What is Your Profit?

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If you run our own business, it is tempting to look at the money you make as your profit. Your income less what you have spent is your profit. Right? Sorry, but no way! Thinking in these terms is going to land you in hot water. All the money you make is called Gross Income.

All the money that’s left after deducting all your expenses is Net Income. It’s not profit. A significant portion of this Net Income has to stay in your business. Profit is something you take out of the business once everything else is taken care of. Lets see what these things to be taken care of are.

  • Start with the business expenses. Have you taken everything into account? Even if you are working from home and are just reselling, which means you are not paying your supplier in advance for your goods, you still have business related expenses. Some of them could be:
    • You are using more electricity than before you started your business. The extra cost needs to be added to your operating expenses.
    • You are using your phone more. Who pays for that?
    • Your internet costs will have gone up.
    • You are probably drinking more coffee!
    • Think and you will find other costs that your business incurs.
  • If you don’t have a complete picture of all your business expenses, you are fooling yourself. These expenses have to be met and if you add them to your personal expenses you are not just incorrectly judging your businesses value, you are cheating yourself.
  • As your business grows, you are going to have to spend more to earn more. Things like:
    • Getting a bigger office
    • Getting another computer or upgrading your current one
    • New software
    • Paying for higher inventories
    • Getting another phone line
    • And lots of other stuff!
  • You need to plan and budget for all these expenses. The money has to come out of your Net Income in regular installments calculated so that when the expenses arises, the money is there.
  • You need to keep some money aside for contingencies. No one is ever prepared for all eventualities. Having a buffer of money, built up slowly is always a safety factor.
  • Outsourcing some of the work of running your company to experts like Ringgle is something you need to look at and budget for. Outsourcing some jobs can save you money in the long run.
  • This is not to say you live on bread and water. Give yourself a salary. Be modest in the beginning and take just what you need. Having this as a fixed monthly outflow will help your budgeting. Depending on the size of your business this should be not more than 25% to 40% of your Net Income, subject to your meeting the other commitments. Your salary will automatically grow with your business.
  • At the end of the year, take a look at your final profit – what is left after you have covered all the other costs. You can take this money and have a ball, but maybe it would be better to put some back into the business for growth or additional lines of work.

You may not make money in the beginning. But you will soon enough. You need to look after yourself and your family. But everything you earn is not profit and thinking it is and plowing nothing back into your business is robbing it of its sustenance!