As entrepreneurs, we are often too focused on growing site traffic, social media following, email list, team size, or whatever other dumb glorifying number that helps you brag in public. But how often do you focus on increasing your profitability? As a small business, growing your profit is crucial for your success.
Recently while mentoring a student, we talked about the importance of knowing the difference between Gross Revenue vs Gross Profit vs Net Profit. It’s surprising how many folks don’t know the difference. Let’s take a look at this in more details.
What is Gross Revenue?
Gross revenue is total sales your company generated by selling your product or services.
No matter how large this number is, if you’re boot-strapped, then this isn’t the most important number.
What is Gross Profit?
Gross profit is your total sales – cost of goods.
In the tech industry, we don’t always have cost of goods because most of our goods are digital (i.e eBooks, courses, software, etc).
What is Net Profit?
Net profit is gross profit – all other costs such as payroll, utilities, office supplies, and everything else.
As a boot-strapped business, this is the most important metric that you need to keep in mind.
Without being profitable, you’re going to have a hard time growing let alone surviving.
I have always lived by the motto that growth is about creating profits not revenue. This allows you to focus in the right areas.
When you have a profitable business, you can invest your resources in increasing your competitive advantage and ensuring long term growth.
Being profitable allows you to make proactive decisions rather than reactive decisions.
Now before you start gloating about your sexy revenue numbers, think about your profit margins first.
Next time, when you read an income report or an end of the year recap, ask yourself the question: what’s their profit margin?
But what about all these big companies posting huge revenue numbers while being in the negative.
Well, they can do that because most of those companies are debt-financed.
If you’re VC funded, your goal is to show huge growth and get acquired by one of the giant publicly traded companies.
You have enough money in the bank to be reckless.
But as a boot-strapped entrepreneur, you want to be mindful of your profit margins because without it, you won’t go very far.
As you start diving into 2016, make increasing profit margins a goal for your business.