Understanding the difference between cash and profit is essential when running your own business. Cash (or revenue) is all the money that comes into the business, whereas profit is the money the company has left once costs have been paid.
In this article, you’ll learn about:
- Different types of profit
- How to improve revenue
- How to reduce your costs
- Keeping track of your business’ finances
Different types of profit
The main purpose of most businesses is to make a profit, which is why it’s often used as a key marker of a company’s success. The more profit you’re making, the better your business is performing. While having a high revenue is usually seen as a good thing, you’ll make very little money if your costs are just as high.
Businesses analyse two types of profit: gross profit and net profit.
The more simple of the two, gross profit is everything you have left after removing the cost of goods (or service) from your cash sales. Working out your gross profit is quite simple with the following formula:
Gross profit = Sales – Cost of goods or services sold
For example, if a cleaning service brings in £20,000 a year, but the supplies and labour cost £10,000, then they’re only left with £10,000 gross profit at the end of the year.
Calculating your net profit is a little more complicated, but it’s a lot more accurate at telling you how your company is performing. Net profit takes all of the business’ expenses into account, including operating costs, any debts you may owe, and taxes. The formula for that is:
Net profit = Sales – Cost of goods or services sold – Operation costs – Debts – Taxes
So if the same cleaning service also spent £3,000 a year driving to clients’ locations, £1,000 paying back the loan needed to buy their equipment, and another £1,000 on taxes, then their end of year net profit would be £5,000.
Keeping track of a business’s cash inflow, expenses, and profits can be time-consuming. The Countingup app makes this easy for thousands of business owners across the UK.
In both cases, there are two main ways to improve profit. You can either increase revenue or reduce costs. In either situation, it’s important to set goals and know how to reach them.
How to improve revenue
There are a couple of different ways to help boost a business’s revenue. You can either charge more for the goods and services you currently provide, or attract more customers and clients. Charging your existing customers more can tempt them to switch to your competitors. Instead, you can use various marketing strategies to build better brand awareness.
Marketing your business
Whether the business is for dog walking or delivering food, you need to be able to market yourself effectively. This can be through more traditional means (like billboards or radio/tv adverts), digital methods (such as social media or influencer deals), or even through word of mouth.
The method you choose should depend on the type of business you’re running, your target market, and what you can afford to spend on marketing. It’s important to remember that you invest in marketing to build interest in your business and improve both cash and profit.
If the company is focused on local areas, then the marketing should also focus on promoting your business locally. Alternatively, if it operates internationally, the focus could be on social media marketing to reach wider audiences.
How to reduce your costs
Reducing your costs is an excellent way to improve your profits, but it’s not always clear how to do it. If you run a small business, one potential method could be to look at which areas are taking up significant amounts of your time –– especially if that time could be better spent elsewhere.
If you spend a considerable portion of time on accounting, preventing the business from fulfilling more orders, that could create a hidden cost. One possible solution would be to invest in a mobile accounting app. While this may come with the visible cost of the software, it could improve both cash and profit since the business may be able to handle more orders.
Whenever you see money leaving your account, that is a visible cost. Things like supplies, rent, and utilities all cost money and need monitoring to make sure you don’t spend money unnecessarily. If the business pays for your vehicle’s fuel and mileage, calculating a more efficient route could help cut costs in the long term.
Additionally, if a manufacturer doesn’t produce the goods to a high enough quality, this could cause customer complaints and impact revenue. One potential solution may be to switch to a manufacturer with higher quality output.
Keep track of your business’ finances
Deciding where to spend or save money can be one of the most challenging aspects of running a business, especially when you’re self-employed. Unless you have the right infrastructure in place, managing a growing company can get increasingly difficult. That’s why thousands of business owners use the Countingup app to make their financial admin easier.
Countingup not only offers a business current account, but combines this with built-in accounting software so you can manage all your financial data in one place. Some of its helpful features include receipt capture tools, tax estimates, and cash flow insights that help you get a clear idea of your cash and profits.
Plus, if you use an accountant, you’re able to seamlessly share your bookkeeping data without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!
Find out more here.