These immortal words, accompanied by a shrug and a generous swig of prosecco were uttered by a good friend of mine a few weeks ago when I met her for drinks on a rare night out. Not wanting to ruin the atmosphere by slapping her off a bar stool, I simply nodded and quickly downed my own drink in a desperate attempt to stop myself from screaming,
“Money in the bank doesn’t necessarily mean your business is profitable!”
She’s a good friend, generally sensible, with great ideas and a business that keeps her busy, but, I’m not going to lie – that sentence has kept me up nights.
And it got me thinking:
If Lucy, a woman whom I’ve always known to be organised, intelligent and, on the surface of it at least, relatively business-minded, isn’t really sure how profitable her business is, how many others are thinking the same thing about their ventures?
I’ve said it before, and I’ll say it again – numbers aren’t everyone’s forte, and just because you have a great business idea and a vision of where you want it to go, it doesn’t mean you automatically understand how the financial side of things work. There are probably even founders of multi-million pound companies who took a while to figure it all out.
So this week I am going to answer Lucy’s question…
‘No’.
But that would make this a very short blog, so let me delve further…
If you want to know if your small business is making money you need to look at your company’s income statement/profit and loss, rather than your bank balance.
There are two parts:
- Gross Profit – this is your revenue minus your direct costs
- Net Income – this is the gross profit minus all the expenses subtracted from your revenue
For your business to be considered profitable, it needs to generate enough gross profit.
Well, there’s money in the bank – so everything must be ok.
But seeing this money in your account could give a false sense of security, and if you really want to know if your business is profitable you need to think about a lot more than how much is in the bank.
Like, for example; whether or not it’s someone else’s name on it!
Chances are a lot of that money is already spoken for in order to pay rent and utilities, wages, buying new stock….and it’s essential that money stays there in order to cover those payments.
Sure, it’s exciting to see a large amount in the bank as a business owner, and it’s stressful (and a bit heart breaking) to see it going back out – but you can’t count every penny that comes in as profit. Ultimately it’s gonna take that money to make more money; investing in new stock, better equipment, paying the wages of great employees – even paying what you owe in full and on time in order to keep your business credit report clean – is all going to lead to increased revenue and bigger profits.
Profitability only really happens when the money coming in exceeds the money going out, and keeping a close eye on your business transactions, rather than just checking the account, seeing there’s money there and thinking, ‘hey, I’m doing ok’, will give you a clearer picture of how profitable your business is.
So, don’t be a Lucy; don’t assume the success and profitability of your business can be measured by what’s in the bank at any given time. Regular financial tracking is vital if you want to see your efforts pay off, and if you’re not too sure where to start, my course, Business Planning 101 will tell you everything you need to know.
Click the link below and book your space now – before Lucy gets in there first!
https://elevey.co.uk/business-planning-101-with-sally-brady/