Income Statement Secrets (Profit)
Welcome back friends! This is the final video in my series on the Profit Equation. I have spent all month talking about this. You are probably sick of hearing about it. But I talk about it because it is so important. In this video we are going to focus on Profit.
VIDEO SUMMARY
I am going to start by putting up the profit equation. You have all seen this many times. The income statement for a business is based on this equation. What you need to understand here is that profit is the comparison of revenue and costs.
Example
Let us look at a couple of examples. When revenue equals 100 and cost equals 50, your profit is 50. When revenue equals 100 and cost equals 150, you have a loss of 50. You can see that your profit is the difference between revenue and cost. The greater you can increase the difference, the more profit you make.
What is Profit?
Most people understand the basic concept of how to calculate profit, but I want to dig a little deeper. What really is profit? Profit describes the performance of your business model. Your business is operating in a certain way to generate revenue and costs. If you are spending more money than you are bringing in revenue, you will not have good performance. Your performance is reflected in your profit, which would show a loss. Profit is communicating to the world, how much value you are creating.
There is a fundamental lesson the profit equation is teaching you: Live Within Your Means. If you want profit, your costs have to be less than your revenue. This seems simple, but it is one of the most challenging ideas. In 2017, CareerBuilder did a survey of U.S. Workers and found that 78% live paycheck to paycheck. ¾ of the US has costs at the same level as their income. Now that is people’s personal finances, but you better believe that influences how they manage money in businesses.
The whole point of financial management in a business, is you are managing the profit equation. You need to live within your means, which means your costs need to be less than the money coming in the door. This is a big mental shift for a lot of people, because when people see money, they want to spend it.
Benefits of Profit
Let us talk a little about why you do not want to spend your money. It all comes down to structuring your business around this equation. You are structuring your business so that your operational expenses are always covered with a buffer. That buffer is your profit. What that buffer gives you is choices. It means you are going to have extra money every month. You can use that money in a bunch of different ways to grow your business: Save the money for emergencies, pay off debt, invest in long term capital improvements, invest in business development to grow revenue, or you can pay a dividend and give the profit back to your investors. All of a sudden, you have all these choices that can set your business up for long term success.
Now I know I will get a lot of pushback from people who say, “My business is too small to save extra money.” But according to this equation, the size of your business does not matter. You can do this at any size. Whether your company is massive or small, it is your job to make sure your costs are less than your revenues. If it is not, and you are living paycheck to paycheck, you need to fix it. You need to do whatever it takes to get your business organized according to the profit equation, because the long term success of your business is at stake.
Profit’s True Impact
Once you understand the significance of this concept, you can use it to supercharge your organization. The more you can squeeze out this profit, the more flexibility you have in your business. Profit is funding your dreams. You are going to have some long-term strategic vision for your company. You are going to have goals and things you want to accomplish. Profit is going to give you the money to achieve your dreams. So the more you can increase your profit, the faster you can get to your dreams. If you can squeeze out 50% profit, you can get to your dreams that much faster.
I am going to take this a step further. The profit equation can end all suffering from money on the planet. Think about the people in your life who are experiencing money problems. Money problems come because people are not living within their means. Someone might be experiencing medical issues, or they might lose a job. Whatever it is, their revenues and costs are unbalanced. That causes money problems. The point is that money problems have nothing to do with money. It is all mental. It is all based on the choices you make to structure your life in a way to live within your means. Do you understand what I am saying? If money problems are all mental, we could eliminate all suffering from money in the entire world within 24 hours. All it takes is people changing their mental attitude about money. You achieve that by teaching other people about the profit equation. The next time you look at an income statement, remember what it is telling you. It is giving you the secret to achieve your dreams.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.