Understanding revenue and the true nature of profitability
Healthy sales revenue numbers don't always mean your small business is profitable.
It's easy to mistake rising sales and income for profitability. But unless you understand your operational costs, profit margins and net profit, you won't truly know whether the business is making long-term, sustainable profit.
What is sales revenue?
Sales revenue is the total amount of money your business brings in from selling products or services over a specific period. Crucially, though, revenue is calculated before you subtract any operational expenses, taxes or deductions.
Revenue tells you how much money came in, but it doesn’t tell you how much you have left!
What is net profit?
Net profit is your ‘bottom line’. It’s the actual take-home money left over from your company’s total sales revenue after every single operating expense, tax, interest payment and cost is paid.
This net profit figure reflects how much will be left in the pot, once you make all the unavoidable deductions that are part and parcel of running and operating the business.
What’s the best way to track your profitability?
So, if you’re looking to truly grasp the profitability of your business, relying on a cursory glance at your sales revenue figures is not the best approach.
As we’ve seen, revenue is the total cash your business pulls in from sales. But net profit is what you actually get to keep – it’s the money remaining to pay your directors’ dividends, for reinvesting in the business and for increasing your cash reserves.
Helping your business drive the very best profits
When you’re trading as a business, there are unavoidable expenses, costs, deductions and taxes to pay. So it’s vital to factor these deductions into your financial overview.
Come and talk to our team about tracking your net profit number and adding this all-important metric to your dashboards and regular financial reporting.
