The One Thing Small Business Owners get so Wrong (Sales vs Profit)

by Clare Wood 6th of June, 2023

The One Thing Small Business Owners get so Wrong (Sales vs Profit)

There’s a big mistake that many small business owners make and not understanding this will have a huge image on your capacity to grow a successful and lasting business. It’s the distinction between sales and profit. Let’s do an accounting 101 (don’t worry, I’ll try and make it fun)!

Sales is the amount of revenue or income your business generate and it’s a completely different figure to your profit. For instance, one of my clients was an interior designer. When we first worked together, she proudly shared, “I make a million dollars a year.” And she was right, she did make $1m in sales per year. But she was struggling big time with cashflow, and when we dived into her reports a little deeper, we realised that she spent around $400,000 on stock and another $400,000 on her team, the warehouse, office and other business overheads. Her actual profit was only $200,000 per year, and she then had to pay taxes out of this amount.

The truth of her situation was not, ‘I make a million dollars a year’; it was, ‘I turn over a million dollars of sales a year and make a profit of $200k per year before tax.’ That’s very, very different to making a million dollars a year in profit, and, as a business owner, you need to be crystal clear on the difference between the two. Why is that?

Your sales number might sound impressive on paper but that’s not the money you get to keep in your bank account. Out of that money needs to come your business expenses. So you actually only get to keep your profit (or wage). And out of that, you need to pay your taxes. As a qualified accountant (CPA) I have seen many business owners unfortunately get into a financial pickle because their profit and their cashflow isn’t where it needs to be to sustain the business on an ongoing basis. And this is a problem, because poor cashflow is the primary reason why small businesses fail.

If you want your business to be a raving success (and you should!) one of the most important things you can master is your business financials. There can be a lot of resistance to this, as some people believe that finances are boring or overwhelming… but the truth is that they aren’t that hard once you understand how.

The first thing you need to understand is how to read a profit and loss report as this will empower you to know how much profit your business is making. It can also be really helpful to create a budget for your business, so that you have a clear plan of your incomings and outgoings for the coming year (and you can plan for your profit). The final finance tool to master is a cashflow forecast. Inside a cashflow forecast, you plan the timings of your cash inflows (and outflows) to ensure you never run out of cash.

I think I’ve made my point by now: focusing on just the sales figure can be inaccurate and misleading, especially to you, the business owner. Getting clear on your profitability is the secret to building on it and growing your business (in a meaningful way). How do you even know if you’re making more money if you don’t even know how much you’re making to begin with? Let’s start changing the conversation around profit to set yourself up for your most successful business!

A numbers nerd and accountant (CPA), Clare Wood is not your average bean counter. As a money mentor, she uses her number powers for good to help entrepreneurs transform their money mindsets by following her proven frameworks to create big, beautiful business profits. Listen to Clare’s podcast here, buy her new book Intentional Profit here and visit her website here.

Tags: business owner small business