Despite what you might think, not everybody who owns a business has ever studied accounting or administration – they instead turn to the experts, delegating such tasks to a professional so that they can focus on their own strengths.
That being said, whilst having a professional on your side to advise is great, it’s also a good idea to get stuck into some basic accounting ideas yourself in order to help you to keep track of your company’s day-to-day running.
To help you along, we present this (hopefully useful) article, discussing profitability and revenue – including what they are, what the difference is, and how understanding that difference can help you to better assess your business’ present and future success. Here we go!
There’s a Difference? I Had No Idea!
The difference between revenue and profitability is simple: revenue is the total money coming into the business, whereas profitability is the capacity to generate profit – simple!
The best way to understand this concept nailed down is to apply it to a real world example, so let’s imagine you own a design agency.
Now imagine your design time for one project costs £400, and you quote your client £1,000 for the work. If you sold ten of these projects in a month, your revenue would be £10,000 (total money coming in).
Your profitability in that hour, however, would not simply be the difference between £1,000 and £400.
It’s tempting to think this way, but there are other costs as well. There’s your hip offices (in the centre of Manchester), your favourite design software, and your other three employees. Say you split this out and applied it to all 10 projects, and it added up to £300 per project.
In this example, then, instead of making a £600 profit per project, you’ve made a £300 profit per project.
This leads nicely onto the next point:
Why is it Important to Know the Difference?
Although knowing how much money is coming into the business every month is great, revenue is limited in what it can tell you – and hides the fact that there are costs and expenses involved with the business’ running. The result is an unrealistic expectation of how your business is doing.
By focusing on your company’s ability to generate profit instead, you’ll be able to instigate much faster, more concrete growth in no time at all. This is possible because you’ll be enjoying a more accurate picture of how the business is performing – but also because analysing profitability helps to highlight areas where change needs to be introduced – such as unnecessary costs, much-needed price reviews, and productivity issues.
On top of that, once you know how much profit you’re actually set to make, you’ll have a better idea of how much money you have available to you to invest back into the business.
How to Shift Focus Onto Profitability
Now you’ve got an understanding of the difference and its importance, it’s time to look at how to make more of your revenue profitable.
There’s two things you need to focus on to make more money: actually collecting it, and what you spend it on.
The first thing you need to do is get your head around invoice payments and cash collection. There’s a plethora of apps and integrated tech that is available to help you with this – ask us about Xero’s integrated payment function, or about integrating Chaser or DueCourse for example.
These apps help in the following ways:
- Xero allows customers to pay invoices from a link provided in the invoice email
- Chaser and similar apps automatically send emails to late paying clients encouraging them to pay off their invoice
- DueCourse provides you advances on outstanding invoices
What Do You Do with Your New-Found Profits?
Once this is all taken care of, it’s time to look at what you do with your profits.
Naturally, you’ll want to spend what you need in order to ensure that you’re the best at what you do. Whether that’s by investing in equipment, training or marketing, or simply making sure everything’s as efficient as possible – your profits are there to help you to achieve these goals.
You will also want to make sure you’re not spending too much on unnecessary expenses and outgoings.
For example, are you paying for multiple design software accounts, or can you combine all those into one? Are you using the massive office space you’ve hired, or could you work from a smaller place? Are travel expenses to clients in further locations reimbursed?
Remember, though, that being ruthless with expenses does not always result in higher profits. Cutting the coffee bean spend could result in your staff members’ productivity reducing significantly – or them leaving altogether.
So there we have it! Profitability is different to Revenue, and if you understand the difference and focus on using profit properly, you’ll get the advantage you need to beat the competition and grow as a company.
If you’d like any help working out how much of your revenue is profit, or more information about how to sort out your invoicing, or even just to see what other bits of business admin you could be saving money on, arrange a discovery call today. We’d love to help!