How to Understand Profit

For aspiring or new business owners, many people misunderstand what business profit is and how to calculate it. 

And on top of that, because of upbringing or societal influence, some people feel that business and profitability are wrong and that money is “evil”.

Other people may also swing to the other end of the pendulum and aim to make large profits at any costs– even if that means illegal or unethical business practices, taking advantage of customers or treating employees unfairly.

Both of these extremes are unhealthy and should be addressed, not just for your personal well-being, but also for the longevity of your business. 

The issue is not whether or not money is “evil”, because the Bible never says that. Instead the Bible states in 1 Timothy 6:10 that it is the LOVE of money that is the root of evil, not money itself. Because of this, working towards and earning a profit is not the issue, but rather how we work towards profitability and then what we do with that money once we have it.  

Ultimately as the business owner it is your responsibility to steward your profits and resources wisely, and to live and direct your company in a manner that reflects your personal business core values. The values can include business reinvestment, paying yourself a salary and how much that is, giving back to the community or using resources to help build the Kingdom of God. 

In order to wisely choose how to spend your money, you must first understand exactly what constitutes a profit and how to calculate it, so you know exactly how much funding you have available for spending. 

New business owners commonly get overly excited when they start to see money coming into their company. However, they must understand that their profit is not based solely on the amount of sales. In fact, there are many expenses that must be considered when accurately calculating a company’s profits. Of course a business owner must include the simpler direct costs of running their business, but they also can’t forget the indirect expenses too. Costs to take into consideration include but are not limited to the wholesale product, employees, rent, utility, marketing fees, raw materials, office supplies, software subscriptions, and other overhead costs. 

So just because you sell $10,000 in product this month, does not mean you profited $10,000. And let’s say you know your inventory cost was $6,000, again, simply deducting the inventory cost will not give you an accurate picture of your profits either. Instead, you must remember to include all other operational expenses, taxes, and budget for upcoming quarterly and annual expenses that should be part of your budget. 

Additionally, if your company pays out dividends, you would also need to subtract that from your revenue in order to really understand your retained profit. 

A correct understanding of profit is a basic necessity for all successful business owners. Profit is your financial gain after you have paid all of your direct costs and indirect costs.

Unfortunately, it is also very possible for you to not make a profit, and for you to experience a financial loss at the end of the month. Experiencing a financial loss may cause you to consider closing your business, but this may not be the next step, especially if you are just starting out and are taking on many one time start up related costs for your company. 

But, if your company is operating in the red for several months, you certainly need to be proactive and address this issue because if things don’t change, closure will be imminent. We encourage you to talk with your business mentor or find a business coach who can help you understand your business’s financial situation, and make a plan to improve your business operations. There are always positive changes we can make to help our businesses operate more efficiently and increase profitability. 

Do you need help starting, managing or growing a business, check out our Business StartUp course!?  

Through our online program you will learn how to identify your personal values and strengths and resources, how to choose a solid business idea, how to do market research by using our step by step market research guide, and even how to write a strong business plan. But that’s not it, you will also learn about life/work balance, time management, goal setting, leadership and financial management. Don’t miss this opportunity! Start today!