Profit vs Revenue: Why Profitability Is More Important Than Revenue

Small business owners have two things in common no matter what product or service they sell: passion and entrepreneurial spirit. Building a business around whatever thing you love to do, teach, or make gives you the freedom and flexibility that you crave. I know this to be true because it’s why I started my own small business. 

But let’s be honest, when it comes to building a profitable business, the learning curve is steep. 

Navigating the new terrain will be easier if you focus on the right goals from the beginning. And one of the most important goals is to focus on is how profitable your business is, rather than how much revenue it produces. As the saying goes, “It’s not how much you make, it’s what you keep.” 

Cement that adage into your psyche and let it guide your business decisions moving forward. When the time comes to determine if you’re going to hire employees, upgrade your systems, or expand your product line, the choice should be made based on whether or not it will increase your profitability.

Don’t make the mistake of thinking that just because your business is generating revenue that your business is successful.

Photo by: GossBoss

Profit vs Revenue — Which Metric Matters Most?

Let’s do right by our accountants and throw in a couple of definitions here. There’s no need to get into the weeds with financial reporting right now, but clarity around these two particular metrics will help to identify what’s most important to track.

Revenue

Also known as the top line, revenue is the total income that your business generates through the sale of products and services. They call it the top line because that’s where it appears on your income statement.

Visualize your total sales (or revenue) listed at the top of your income statement. As you work your way down, your expenses chip away at that total sales number. When everything is accounted for, you’re left with your profit.

Profit

Profit is referred to as the bottom line because that is the money that is left at the bottom of your income statement after accounting for all expenses, debts, additional income streams, and operating costs. 

Paying yourself out of your profits should be a priority, but the way you go about doing it may be challenging at first. If your business is new you’ll have to figure out how much to reinvest in the business and how much to pay yourself depending on your goals. More established business owners will enjoy more consistent cash flow, making it easier to predict how much profit you’ll generate and how best to allocate it. 

Increasing Revenue Doesn’t Necessarily Increase Profitability

People make the mistake of putting too much weight on how much money they bring in. Celebrating the revenue that your business generates delivers the same dopamine hit you get from likes on social media posts. It’s a vanity metric — it makes you feel good, but it isn’t always an indicator of true success. 

Now don’t get me wrong, there’s nothing wrong with aiming for 10k, 20k, or 30k and above months. Most of us have financial milestones that we aspire to hit — it’s a big part of why we started our businesses. But don’t forget to take into account how much your expenses will impact that number. 

Making the jump from 20k to 30k, or whatever the next benchmark may be, often comes with increased expenses. The ad spends, marketing consultants, and full-time employees you’ll need to bring on board to help you nail that 30k month will add up and eat into your profits. Without organizational efficiency and proper planning, increased revenue can be costly.

If you train yourself to think about profit first, then you’ll be better positioned to streamline your expenditures, control your cash flow, and maximize profits along the way. 

Keep Spending Down to Drive Profitability

If you know your numbers, you’ll be quick to identify when unnecessary expenses start snowballing out of control. Expensive equipment, software or subscriptions, and trendy office spaces will be enticing, but will they drive the bottom line higher?

When you’re focused on profitability, it’s easier to exercise restraint. Your mind will be trained to see that your earnings may suffer and the increased expenses won’t result in greater profits.

There’s a phenomenon called lifestyle creep which happens when increased income leads to increased discretionary spending. This is usually in reference to individuals who experience an increase in earnings and feel compelled to upgrade their lifestyle. 

But it’s equally applicable to businesses. Making more money is exciting, but it tends to make people then spend more money either personally or professionally if they’re not conscious of it. A profit-first mindset can help you prevent the desire to increase your expenses unnecessarily as revenue increases.

Prioritizing Profit Over Revenue

You develop systems and processes over time. Anchor those systems with profitability in mind from day one. Even if your endeavor does start out as a side hustle, get in the habit of paying yourself first. Continue to build your systems around profitability as your business evolves.

One of my favorite tools for managing your finances and prioritizing profitability in your business is to set up multiple bank accounts. At minimum, open an account for operating expenses, an account to save for taxes, and an account to save your business profits. The separate accounts will help make it very clear how much your expenses are costing you, how much you’re paying in taxes, and how much profit your business is actually producing. 

Depending on the structure of your business and how you pay yourself, you’ll likely be paying yourself from the profits account, at least in the early stages of your business. Paying yourself is incredibly important. All too often, small business owners sacrifice themselves for the “hopeful” growth of their business. 

Foregoing your own paycheck for a month or two in order to reinvest in the business may seem like the right thing to do, but far too often that month or two turns into six and beyond. If you are running a business for free, then you aren’t running a business at all. 

Being A Profit First Business Owner

The book I often recommend to my clients is Profit First by Mike Michalowicz. In the book, he writes, “Profit must be baked into your business. Every day, every transaction, and every moment. Profit is not an event, profit is a habit.” 

As the owner, you set the tone for your business. Success is a byproduct of your systems, habits, and mindset. Your business can bring an enormous amount of personal fulfillment as well as financial stability. Maintaining a profit-first mindset will set you up for long-term success and sustainable growth. 

Although fear and anxiety will likely creep in throughout the process, that’s just part of the deal. Anchoring to your core priority of profitability first helps you sail through those choppy waters. Continue to ask yourself, “Will this help or hurt my bottom line?” With that question as your guiding light, you’re well on your way to building the kind of profitability that will keep you in business for the long term.

Continue Building Profitability In Your Business With Financial Fitness Coaching

At Financial Fitness Coaching, we know the importance of profitability in your business and are here to help you maximize it. Helping small business owners optimize their systems, eliminate unnecessary spending, and enjoy long-term success is what we do best. To see how we can help you and your business email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar.