#097 - Revenue Vs. Profit: 3 Important Differences & What the Numbers Tell You

Show Notes

Even for the most experienced entrepreneur, understanding the difference between revenue and profit can be confusing. Whether you’re a first-time business owner or aspiring to become one, knowing what the difference between topline (revenue) and bottomline (profit) can be just as important as knowing exactly what these metrics tell you about your business. 
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In this Money Wise episode, Lori Vajda and Nola Boea are explaining everything you need to know about revenue vs. profit and why knowing the actual numbers of both is crucial for the success of your business.

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In This Episode You’ll Learn 

• How revenue and profit influence your business outcomes.
• The financial vocabulary you need to know when starting and growing your business
• Why revenue can’t tell you the financial health of a business on its own.
• Revenue vs. profit, which metric is more important than the other?. 

Key points Lori and Nola are sharing in this episode:
(05:19:85) The terminology of revenue, what it is, what it does, what it doesn't tell you about your business, the difference between net and gross revenue. 
(09:21.32) Knowing your revenue and your expenses ultimately helps you figure out the difference between these two very different profit streams.
(13:36:46) An easy way to understand indirect costs which include the expenses that you have, whether or not you are making any sales.
(17:58:43) Understanding how to price your products and services.

Resources 

You can subscribe to Lori and Nola's show, (we love you and want to make it easy) on Apple Podcasts, Spotify, Audible, Google Podcasts, Stitcher, or wherever you listen to podcasts.
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FREE Download revenue and profit reference guide

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Transcript

[00:00:00] Nola: You've likely seen Facebook ads or read newsfeed headlines, touting entrepreneurs who are making six and seven figures in passive income or working part-time. These experts promise you can, too. All you have to do is purchase their course or enroll in their masterclass, and they'll teach you their system to earning millions. But what these business owners don't tell you is how much of the revenue they generate is actual profit. Stay tuned friends, because in this episode, we are breaking down the financial vocabulary you need to know when starting and growing your business in a new feature we are calling Money Wise.

[00:00:36] Announcer: You're listening to the Sticky Brand Lab podcast, where time-strapped professionals like you learn how to create a business you love in as little as three hours a week.

[00:00:47] Lori: You could say one of the primary responsibilities of any for-profit company is to actually make a profit. But what does that really mean? For example, let's say your company makes a profit, but doesn't have cash flow. Will you be able to stay in business? What about if your business' revenue is good, but you have no profit? Is that a good thing or a bad thing? When it comes to the financial jargon of a healthy organization, even a healthy side business, how knowledgeable are you? Well, friends, if your goal is to be prosperous, you've come to the right place.

[00:01:22] Nola: You know, there was a time when I was mesmerized by certain Amazon success stories. They would show people just living in luxury who claimed to have sold a million that month or that year. And in fact, this one particular couple I always think about they had this full proof formula. And they would be happy to sell it to me. Fortunately, I didn't purchase it because then I was enlightened by the video of someone who also sold a million dollars online through a combination of Etsy and Amazon, and she broke down her process. How much her products cost and how much time she spent to sell them and what it took to process the orders. And in the end, she calculated that she had, after that million-dollar sales, only made $26,000.

[00:02:14] Lori: You know, your story reminds me, you're familiar with Marie Forleo, right?

[00:02:19] Nola: Yes.

[00:02:20] Lori: Yeah. She's probably a seven, maybe an eight-figure business woman. Very successful. But part of what makes her successful is she works with a number of well-known affiliates who, when she's offering a major course, to try and funnel in prospects. Well, one of the video. Actually, it was a webinar that I was watching was with a well-known affiliate that I'm not gonna name who she is. But this was an eyeopener for me. This woman who also touted making six and seven figures confessed that prior to working with Marie, to being in the red and she talked about how difficult it was for her to even share that information with Marie. And Marie then interestingly enough, charged her probably at a significant discount to come into her program. But she credits Marie with helping change and turn around her business model. It was a similar story what I really was aware of was how many of those Facebook professionals that I see who are well known, travel in similar circles, who aren't making true profit, but tout making six, seven, and now even eight figures.

[00:03:47] Nola: Yep, exactly. And that's why we're doing this. So. I'm going to throw out some terms and you, Lori, tell me how familiar you are with them and whether or not, you know how to apply them in business. You ready?

[00:04:03] Lori: All right. Okay. I'm ready.

[00:04:05] Nola: Revenue, profit.

[00:04:08] Lori: I am familiar with those terms.

[00:04:11] Nola: Hmm. What about net profit versus gross profit versus operating profit?

[00:04:16] Lori: I'm going to confess that I was not as familiar with those terms until we went ahead and started this conversation to record this episode.

[00:04:27] Nola: Okay. And what about cash flow and assets?

[00:04:33] Lori: Same situation. All of those terms. I would've taken a stab at, I would've probably got part of them correct, but there was a lot that I didn't understand. So here's the thing before you continue on, because then you're going to get to terms, as the MBA of our duo, in which I'm going to not truly understand the terminology. The whole point of this was to really help non-business minded or non-MBA individuals who are just getting ready to start their side business, or even their small business learn these basic terms and understand why it's important. So let's get started at least in the beginning with the terminology of revenue, what it is, what it does, what it doesn't tell you about your business.

So generally speaking, revenue is simply the income, your business earns from the sale of goods and services. And that total is actually what's referred to as gross revenue. On the other hand, net revenue is the amount of money your business brings in from all of those sales during a specific period of time, minus the expenses incur during that specific period of time. And I wanna bring up one other point before I ask you this Nola. One of the things that I've noticed from consultants or coaches or people who are just starting out is they look at a sale as a sale, and don't have that last part that I just said, which is falling into a specific time period. So, something can look profitable because you actually sold it a service or products and services, and you aren't taking into consideration the expenses occurred in that same calendar timeframe. Do you see that as one of those challenges that people have?

[00:06:41] Nola: Absolutely. And in fact, we're gonna get to that as far as cash flow, but you are so right. And that's why, well, number one, it is good to look at a point in time. you know, when we're talking about revenue and net revenue, you also need to take the short-term view and the long-term view.

[00:06:59] Lori: Well, that brings up the question of why is it so important to understand revenue?

[00:07:04] Nola: Well, let me just paint a little analogy. Okay. Okay. So there's really a big difference between gross revenue and net revenue, like you just said, and an easy way to remember that is, think of gross revenue as the full paycheck before you've deposited it for the month and think of net revenue as what's left in the bank after you have paid your bills, filled the tank and stocked your fridge, what you have left at the end of the month is actually your net revenue. And that's a big difference when you're thinking about what you have to work with.

[00:07:39] Lori: That is a huge difference. So why is understanding revenue so important? Well, there are a number of reasons, but two really big ones as a solopreneur or a part-time side-business-preneur is it allows you to forecast. For example, you could spot trends. Certain sales might occur at different times of the year, and you could have a downtime in sales at certain times of the year. For example, this time of year kids are going back to school. So, supplies for school can see an increase in sales, but they might see a huge decrease in June and July when school is letting out. And then an uptick when school is getting ready to start again. So that's a good example of being able to spot, not only those trends, but being able to know that you're gonna have that downtime means that you can then mindfully spend less for overhead costs because you can anticipate. And that's a hard thing to do when you're just starting your business, cuz you don't have those trends. You need to be in business for six months to two years before you can start counting on some of those trends.

Another reason why it's important to understand is paying taxes. If you have quarterly sales tax, knowing what that is going to look like can help you determine how much you're going to owe so you can budget accordingly.

[00:09:11] Nola: Yes, you've nailed it. knowing your revenue and your expenses ultimately helps you figure out the difference between your profit and your profit margin. Speaking of which, now that we have explored cut revenue, how do you determine your profit? We've talked about, you know, gross revenue and net revenue. What about profit? Basically, your profit is the amount you have left over after you subtract all the expenses from your revenue. Now, what kinds of items qualify as expenses? And now we're gonna talk about this because there are both direct costs and indirect expenses.

[00:09:50] Lori: Time out. What does that mean? What do you mean by direct and indirect costs?

[00:09:56] Nola: I'm glad you asked because I will explain it. So direct, direct costs. Are costs that you, your company incurs to manufacture goods or purchase inventory. And that's specifically in the case of products, that terminology, since we're talking about terms, is called costs of goods sold. And you can see that as an acronym, COGS. So that's the direct costs that go into producing whatever widget you're selling. For example, it could be the cost of buying or acquiring that blank t-shirt that, you're about to put your special design on.

[00:10:34] Lori: Okay. That makes sense. Okay. Now, is that the same terminology, if you provide a service?

[00:10:41] Nola: That's a very good question. Actually, the accounting terminology is called Cost of Sales, cuz you don't have necessarily a hard good, but it is the same idea. This is a, the direct cost that you or your company incurs to provide that service. It could be hard costs like the supplies of, let's say a nail tech, you know, they're using Emory boards or using acrylic.

It could also be the hours that you're paying a staff person or even paying yourself when you're on the payroll. But that actually goes into providing that direct service to a client. Okay. And so let me talk about specific direct costs, because this is helpful later when you're thinking about pricing, cuz you really need to know what is a direct cost and what isn't. So think about things like employee compensation.

So that can then be salaries or wages, commissions, even retirement benefits, or it could be also in the case of farming out tasks to someone like on Upwork, you know, a consultant expense or a contractor expense when they're specifically working on that product or service.

[00:11:45] Lori: Oh, because I was gonna say, if we're just starting a side business or we're just starting a small business, the chances of us having an employee are pretty nil to zero. Also the same thing. Did I get a good accounting term there? Uh, but when you said hiring or outsourcing some of that to get the job done, that I did not realize would fall under direct cost.

[00:12:08] Nola: It would be a direct cost that falls under the contractor expense category. Okay. But either way, if there is a person that is getting paid to produce that product or service, that is a direct cost.

Now sometimes we hire somebody for indirect costs, which we'll get into in a minute. but indirect costs are, when they're being hired to spend time on your business, not necessarily your client's product or service.

[00:12:36] Lori: Just to clarify, is that similar? Are you referring to working on your business versus working in your business?

[00:12:43] Nola: Bingo. Okay. While we're on the topic of paying people, word of advice, do include your own time. Cut yourself a paycheck, cuz your time is valuable and it should be part of your profit formula and not just the profit part.

[00:13:00] Lori: I think that's a hard one for anybody starting out is to recognize that they should be paying themselves first. Before. And to put that into what you were calling your direct costs, because otherwise it feels kind of like that stories that we were sharing about people who weren't paying themselves, but were paying other people so much that they had nothing left for all the hard work. And basically, they were working to pay other people instead of themselves. So now when we get to indirect costs, what are the things that go into that?

[00:13:39] Nola: These are expenses that you're more or less gonna have, whether or not you are making any sales. You might more commonly think of them as overhead costs. Right? Okay. So your indirect costs can mostly include your overhead costs. And so you need to have the cash flow, which is another term. Even when you're not making sales, you wanna make sure you have enough cash flow to cover a lot of these indirect costs, the costs to be running your business, to keep the lights on, et cetera, during the slow season. So I'm just gonna rattle off about a half a dozen general categories that usually qualify as indirect costs. Okay. So go

One, not in any particular order Marketing costs can include advertising. Those Facebook ads, those Google ads, any kind of advertising, web development, anything to build your brand, get blogs written, get social posts, put up there, if you're hiring somebody to do that.

[00:14:36] Lori: But even if you are doing it right, if I'm doing it myself, that would be part of the salary that I was paying myself.

[00:14:42] Nola: That's a good point. That would be one of those indirect costs for your employee compensation. Absolutely. The next one office supply. Of course, anything that you use in the office, paper clips to toilet paper. And if you have a home office, it could be your printer. Anything that you're using specifically for your business.

Rent and utilities. If you have a home office, again, this can include a portion of your rent or mortgage for the space that, your office takes up. It could even include electricity water and house cleaning, if a portion of that is being used for your office.

[00:15:14] Lori: That's good to know.

[00:15:15] Nola: Again, we mentioned taxes also. You may be paying taxes for your payroll. You may be paying income taxes, sales taxes are also applicable, although I would actually categorize sales taxes as a direct cost because they're usually tied to something that's being provided. But you may not pay them until later on in a season. So it's, again, something to, to keep in mind.

Another indirect cost could be your legal and administrative costs. So, fees you pay to lawyers, accountants, and other consultants. Those will come out of your net revenue as well as, the final one I'll bring up today is technology. A lot of companies are run on platforms out there, you know, you might have software in your desktop, but more often than not, you probably have subscriptions or licenses for a lot of web-based efficiency, productivity kind of platforms.

[00:16:09] Lori: Although, those were like a half-dozen categories of indirect costs, it's still a lot to retain. And I'm sure that there are even more that we haven't mentioned.

[00:16:19] Nola: And because we know that's a lot, we do have a handout, so, no need to write this down or try to remember it. Or if you're feeling overwhelmed, just take a deep breath because we do have a handout. We'll include the link in our show notes and we'll tell you later how to get it, but just don't worry. We've got a reference guide for ya.

[00:16:38] Lori: Speaking of reference guides, I'm switching topics here to talk about the fact what really then is profit?

[00:16:48] Nola: Good question. So essentially earning a profit means you've made more money than it costs to deliver the goods or services that you're providing, and keep your business running at the same time. For example, let's say that you sold $50,000 worth of product. t-shirts like we used in the previous example. But it cost your business $40,000 to even acquire the materials to produce those t-shirts okay. That means your gross profit is $10,000. Now

[00:17:18] Lori: That sounds pretty good.

[00:17:19] Nola: Well, but then that's only your cost of goods sold. Now you still need to cover the indirect overhead costs, and let's say that cost another $5,000. So now you've reached your net profit, which would only be $5,000. So really after $50,000 in t-shirt sales, you finally have a net profit of 5,000. That would really be the final count you have to work with as your profit.

[00:17:46] Lori: You've made these great sales. You made 5,000 from the 50. Sounds reasonable, but I also think that when you reverse engineer, it's really a way of understanding how to price your products and services. I think pricing our products and services is one of the biggest challenges for any entrepreneur. Especially when you're just starting out. That's one of the big questions that always comes up. How much does it cost? And you wanna be competitive, but I think you have to be mindful after at least in listening to how you've helped break things down and really put it into smaller categories so you can understand where the money goes. Understanding also how to price is a whole ‘nother episode that we'll get into in the future. But what I'm sensing here is, this is why it's so important to understand you. Can't just, willy-nilly pick a price for your products and services. You have to understand where your money's going.

[00:18:49] Nola: That's right. And on our little reference guide, we do have a pricing formula that uses some of these concepts. But you're right. When it comes to profit, you can, and you should think in terms, I'll just go back to gross profit and net profit and cash flow.

And all of these are things you think about when you are making prices. You're, you're absolutely right. But gross profit. Once you figure that out, you now know how much money you have left to run your business, to pay your bills, to keep your lights on. So. Always good to know what that gross profit amount is. And then your net profit, also known as net income, is really how much you're gonna make once you deduct all of those expenses, including your interest, taxes and overhead costs from the revenue you've made. And now when you're looking at the pricing, that's really when you'd kind of look at a microcosm of that thought process and you're thinking about what percentage of that price is gonna go to the company. What percentage of that price is actually going into making that widget? And how much is left for profit. And there's a whole formula there, and you're right. It can be a whole ‘nother podcast.

[00:19:54] Lori: It makes a lot of sense, though, when you look at what it costs to do business. Like when you go into a restaurant and fast-food chain might sell a hamburger for a couple bucks, but a sit-down restaurant is going to charge you maybe a hundred times more for a burger. Which reminds me, you know, we've listeners, and I'm sure you, Nola, have heard about companies that have made the news for going out of business, more specifically, because they had great revenue, but they weren't turning a profit. And one that comes to mind in my head is WeWorks. You know, we are those co-op shared office. Yeah. And they were getting all that venture capital and they were spending it like it was their money and not the company.

[00:20:42] Nola: Right. Yes. But the thing is, Amazon did not make any money either for a good 10 years. But they still managed the money and they still kept the investor backing. until they were able to finally make a profit. So yeah, you really have to think about the cash flow. Good point.

[00:21:02] Lori: So basically, the bottom line here is, a lack of profit can mean that your business has too much overhead or too much debt and is not being run efficiently. By the same token, having good profit and good profit margin means that your products and services are priced appropriately, that there's a market for your business, and that you're able to run your business without incurring excessive overhead costs. The best part of that is, it sets up your profit so that you're able to grow your business even more.

So listeners, if you're a little green on the financial jargon for running a business, no worries. We've got you covered. You're gonna find a reference guide on our freebee page, in our resource section on our website. That's StickyBrandLab.com.

[00:21:51] Nola: Well friends, thank you so much for listening to this Money Wise episode. We hope it makes all the difference in you getting started on your business so you can create your best and most exciting life. If you found the information shared here today helpful, let us know by posting here where you're listening or on our Facebook page.

[00:22:09] Lori: Not sure how to diversify your career or income stream so you can create a profitable side business? Contact us at stickybrandlab.com/contact. We'd be happy to help you.

[00:22:22] Nola: Be sure to come back next Tuesday and every Tuesday for another informative, inspiring and motivating episode. And remember action creates results. So tap into your desire to create a business and brand you love by taking 1% action every day. Small steps, big effects.

[OUT-TAKE]

Nola:  And that's okay. Because like you said, as your business grows, your customers will tell you what your customers will tell you what you do better than your cus than

[00:22:52] Lori: Your customers, which is why they should buy from you anyway. Cause you do it better than they do.

[00:23:00] Nola: Smarty pants.

[00:23:01] Lori: better than being the dumb ass. All right.
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[00:23:05] Nola: well, keep that, keep it up. keep it up. Okay. Retake.