The Profit Scale

Three Common Misbeliefs About Profit - Ep. #2

Episode Summary

Salutations, friend! Welcome back to another episode of The Profit Scale podcast. I’m so glad that you’re here for our weekly chat. For today’s conversation, we’re going to talk about profit, but more importantly, we’re going to focus on the three commonly held misbeliefs about it. Who knows? These may be some of the things that are holding you back, too. After this episode, we’ll be able to dispel these commonly held beliefs. I want to make sure that you get to understand profit better and make the most out of this topic, so you better get ready to take some notes.

Episode Notes

After this episode, we’ll be able to dispel these commonly held beliefs. I want to make sure that you get to understand profit better and make the most out of this topic, so you better get ready to take some notes. Curious about what those misblieds are? Take a sneak peak below!

The words revenue and profit are interchangeable.
You are running a profitable business if you can pay yourself.
As long as you are making sales, you are running a profitable business.

RJ Connell Consulting Website: https://rjcconsulting.com/

Freshbooks Website

Quickbooks Website

Episode Transcription

Episode 2: Three Misbeliefs about Profit

Introduction

Salutations friend and welcome to an episode of the profit scale! This is THE podcast for service-based coaches, consultants and creatives looking to stop living paycheck to paycheck pay themselves more, and scale their business beyond the 6-figure plateau all while all without the overwhelm of 60 + hour weeks.

I’m your host and Income Strategist, RJ Connell, and if you’re looking to collect more coins, stop dropping coins, and grow your business sustainably, then you my friend are in the right place! Turn up the volume and lean in, cause we’re about to get started!

Episode Content

Let us jump right into it!

Misbelief #1 - The words revenue and profit are interchangable.

As an Income Strategist, I have to admit that this one irks me. In the online world of entrepreneurship, the terms revenue and profit are often used to refer to any business that is generating money.

You hear it all the time. There are some courses that say “Learn how to start a profitable business,” or the “10 Tips to Running a Profitable Business,” but the term profit is so often misused that many entrepreneurs do not actually know whether or not their businesses are profitable.

These words are not interchangeable — they are not synonyms. Let us actually define these terms so that you understand what each word means and when to use it.

Let’s start with revenue. Revenue is defined as all the income that your business earns through sales. If you work with an accountant that handles your business taxes at the end of the year, you probably also get a Profit and Loss Statement (P&L) from them. On your P&L, your revenue is your top line.

If you have a $20,000 launch of your health coaching program, you just made $20,000 in revenue. If you signed three new photography clients at $2,000 each, you gained $6,000 in revenue. If you closed a new brand consulting contract for $100,000, you earned $100,000 in revenue.

All the money that comes into your business is considered revenue. Does that make sense? Okay, now let’s look at the term profit.

Profit is the difference between what you made and what you spent. It means that if you sold $100,000 worth of your service and between your Facebook ads, and paying out a total of $80,000 for taxes, the salaries of your team and for the software you use in your business, you will have $20,000 leftover. That $20,000 represents your profit, or as they say in the accounting world, it is your bottom line.

Let me give you a very simple yet tangible example. Let’s say that last month you earned $10,000 in revenue which means you looked at your account on the 30th of the month and your total deposits for the last thirty days added up to $10,000.

Now, let us also say you looked at how much money you spent during those same thirty days. You paid $1,000 for the software for your business, $4,000 to yourself, $2,000 to your team, and $500 on marketing.That brings you to a total of $7,500 which means you have $2,500 leftover, though that is not your profit yet. You still need to subtract your taxes because they are also an expense of running a business. So lets say $1,000 for taxes.

You now have $1,500 leftover, which represents your profit! We started with a revenue of $10,000 and after we paid for all the things, we have $1500 left in profit, which is a 15% profit margin.

Now, do you see why revenue and profit are not interchangeable? There is a huge discrepancy between those two numbers and while they both represent a level of success in your business, they are not the same. Your revenue is an indicator of whether there is a match between your market and your service, whether or not your marketing strategies are working, how well you are converting your audience and more, while your profit is an indicator of the cost of running your business. It indicates that there may be gaps in efficiency, whether there is a need to reassess your pricing, your overhead cost, and most importantly, your ability to sustain and grow your business, not just maintain it.

Understanding how these two numbers differ and what they mean for your business is crucial if you want to grow sustainably past where you are now.

Misbelief #2 - You are running a profitable business if you can pay yourself.

Let’s walk through what I refer to as the 4 stages of paying yourself:

Stage 1: When you first started off your business. In this stage, you likely saw every sale that came through your business as money in your pocket. Even if it was for a seven dollar ebook, you just made money and every dollar counts.

It does not cost you much to run your business, so you pay yourself what’s in the account, maybe minus the few paid tools that you use.

Stage 2: Your business is growing and there is more money coming into your business, but you also realize that you are an entrepreneur. Meaning, there are high and low seasons to this income game. You realize that if you wanted to continue to pay yourself, you actually need to leave some of that money in the account during the low seasons.

Stage 3: Your client flow is consistent; the money is flowing through your business, but it seems like the more you grow, the more you owe.

You spend more money on tools, resources and marketing to support your business at this new level. Instead of paying yourself a set salary, you pay yourself what the business can afford. You know you should be paying yourself more, but it is what you have to do to support the business.

Stage 4: Your client flow is consistent; the money is flowing through your business and you are paying yourself the salary you want to earn.

Do any of these sound familiar, friend? I bet they do! Since you are listening to this podcast, chances are you are right around Stage 3 “doing what you need to do to support the business,” which is also known as: underpaying yourself.

The reason I am pointing out the different stages of paying yourself is because even though you may be paying yourself, it does not mean you are paying yourself enough.

I always like to ask my clients this question: would you take a job at a company if they were paying you the same amount of money you pay yourself to work 12 hour days? 100% of the time, the answer is a resounding “No!”

So friend, it is not uncommon for us entrepreneurs, to underpay ourselves in an effort to grow our business. It simply means that even if you do have profit margins right now, they likely are not accurate. If the cost of running your business does not account for you paying yourself more than minimum wage, then your business may not in fact be profitable and may only be generating revenue.

This is a great indicator that you have to take a look at your pricing strategy to see where you can make some adjustments so you can pay yourself more without compromising the growth of the business.

Misbelief #3 - As long as you are making sales, you are running a profitable business.

Based on the definitions of revenue and profit that we clarified in regards to misbelief #1, it is easier to understand why this statement is not true.

It is very possible to run a business that is revenue rich which means you may have a high volume or consistent flow of clients coming through the doors while revenue poor means that there is nothing left over after you have paid all your expenses.

A revenue rich and profit poor business can exist simultaneously. The danger is that the high volume of clients flowing through your business and the fact that you consistently have sales can actually hide the fact that when all is said and done, there is no profit in the business.

This is a problem that increasing your sales alone will not necessarily solve. When a business is generating little to no profit, it is because there is no strategy in place to account for profit margins.

Increasing sales may be a temporary fix but we all know that the more money we make, the more expenses we seem to have. Whether it is because you need to hire more team members to support the new sales, your software cost increases as a function of your client load, or maybe you have been making a sacrifice and underpaying yourself to grow your business, and now you finally want to start paying yourself a decent salary.

The unsexy truth about growing your business is that the more money your business makes, the higher your costs. You have to be intentional about keeping your cost in a reasonable range for your business while also making sure that your pricing strategy accounts for profit margins to have room to grow your business and not just maintain it.

Let me give you an example. I worked with a past client who was working more than sixty hours a week in their business. They were earning well over six figures in revenue before we started working together, which is an amazing milestone.

As always, the first thing I did was ask about their pricing strategy and evaluate their profit margins only to find that there was no profit in the business. This client was an expert in their field and they had a waitlist that was overflowing so they were constantly working and would pay themselves what was left over after covering the business expenses. Since their revenue was so high and there was a consistent flow of income, it hid the fact that there was no profit. When I calculated their hourly rate, they were earning less than minimum wage.

I see this often with my clients. You love the work you do so much that you do not even notice the hours pass by. You can put in 8-12 hours for days and not even notice that the pay is not matching up until you start to reach burnout phase and begin to notice that something is wrong.

Friend, listen, if that example is similar to where you are right now, then let me tell you I am so proud of you for leveling up your revenue and for surpassing the infamous six-figure milestone. You deserve to celebrate yourself!

However, I would not be doing my job if I did not caution you to take a look at your profit margins, and make sure they exist and will support your business as it continues to grow. If you want to build your business sustainably, you have to make sure you are generating profit and not only revenue.

Episode Recap

Let us recap the three misbeliefs we have covered so far.

Misbelief #1: The terms revenue and profit are interchangeable.

We defined both terms and now realize that the revenue and profit a business makes are two very different numbers. Each number is an indicator of important information in your business, but they are distinct, separate and not interchangeable.

Misbelief #2: You are running a profitable business if you can pay yourself.

We talked about the fact that there are different stages to paying yourself that you will likely experience as your business grows. Nonetheless, it is not uncommon for entrepreneurs to underpay themselves, which makes it seem like there is profit in the business, but that may not always be the case.

Misbelief # 3: As long as you are generating revenue, you are running a profitable business.

We talked about the fact that it is very possible to run a business that is revenue rich yet profit poor. It means that you spend as much money as you make, just to keep the business afloat. This is not a sustainable strategy and it will eventually keep the business from growing, if it has not already.

Each one of these misbeliefs are so easily perpetuated on social media through marketing and really because of a lack of education and resources around the topic. But now that you know the truth, you know what you look out for in your business and how to better gauge the success and sustainability of where your business is now.

So what happens if one, or maybe all of these misbeliefs apply to you and you currently find yourself on the hamster wheel of all revenue and no profit? Well, friend, I got you! I am not going to leave you hanging. In our conversation next week, we are going to talk about what to do when your business is not generating profit and how to turn it around.

I am going to share actionable strategies that you can start applying right away, so make sure you are subscribed to the podcast so you get notified as soon as the new episode drops!

Friend, it has been a pleasure to spend this time with you! I call these episodes a conversation because I actually want to hear your feedback on them!

Head over to our instagram page @rjconnellconsulting and join the conversation happening in our stories or in the comments of the post and let me know what resonated with you the most from today’s conversation!

I’m so grateful we got to spend this time together friend, and I will see you same time and same place next week. Until then, I wish you coins, confidence and all the bags!