Why Sales Don’t Always Equal Profit for Small Businesses

May 25, 2021

Imagine this: It’s a hot summer day, and you own an ice cream parlor. 

You’ve had lines out the doors for days, and probably have served up thousands of ice cream cones. 

Scooping up cones is hard work, but it’s worth it, because the cash you’re raking in has you dreaming of buying a brand new Tesla at the end of the year. Life is good. 

But at the end of the month, when it’s time to tally your sales, crunch your numbers, and re-crunch your numbers, you’re still barely breaking even.

How is this possible? You’re a small business owner who has just had a record month in sales. You’ve had insane rush hours and multiple instances of lines out the doors. You’ve had a flood of online orders and have been to the post office hundreds of times this week.

coffee shop

How can it be that a killer month in sales doesn’t equal a huge net profit? If those sales you’re making don’t equal a fat payday in your bank account at the end of the month, chances are that your business might have a serious cash flow problem.

Considering that 82% of small business closures are due to cash-flow problems, this is not something you can afford to ignore. Read on to discover a few very simple fixes to getting your small business finances straightened out.

Know the Key Difference between Revenue and Profit

This might be a business 101 refresher for some, but it’s important to note the key difference between revenue and profit. Revenue, or sales, is the money you receive in exchange for a product or service.
Profit is what is left over after subtracting cost, or expenses, from Revenue (Revenue – Cost = Profit).

Depending on the type of business, expenses can include multiple categories such as inventory, employee salaries, and rent, but these can quickly get out of hand for a business not keeping track of their finances.

Keep Track of all your Business Expenditures

If you find yourself in the red or barely breaking even after a great month of sales, the first thing to do is to find out exactly where your hard earned cash is being spent. An internal financial audit involves accounting for and categorizing every dollar that flows through your door. This means identifying just how much you are spending on labor, inventory, operations, etc.

If you find the prospect of this daunting, you can hire a professional bookkeeper such as KCG Consulting to handle this part and to keep track of your ongoing expenditures.

Don’t Leave Money on the Table

Unless you are running a restaurant or retail business, you’ve probably run into the occasional client who seems to disappear after an invoice has been sent. Unfortunately this is one of the more serious contributors to cash flow problems for small businesses, because it means that they might not have the cash on-hand to cover the expenses that month, which in turn, eats into their profit. 

Business owners juggling a hundred things have very little time to email and cold call people who owe them money, and despite it being necessary for the survival of their business, end up leaving money on the table as a result. In this scenario it will quite literally pay off to hire a bookkeeper to handle accounts receivable and essentially, track down and collect the money owed by clients, getting that money off the table, and into your pocket.

Find Creative Ways to Cut Down Expenses

Once you have a strong understanding of what your small business expenses are and have resolved some of the more obvious cash flow problems (like getting clients to pay you on time), the next step is to evaluate your spending and find clever ways to cut down costs, starting with your highest expenses. Are you spending an exorbitant amount of rent when a more affordable option could be available? Are you spending more than necessary on utilities?

This step will largely depend on what you value and what you can afford to compromise on. For example, if you run a farm-to-table restaurant, you may have high food expenses, but don’t want to compromise the quality of your food to cut costs. In this case it may be beneficial to shop around for other vendors and see if any local farmers are willing to give you a better deal.

Identify which costs are unnecessary and work on decreasing those first. If payroll is a huge chunk of your expenses, consider if it’s beneficial to hire new workers as contractors (1099) instead of as employees (w-2).

Raise your Rates or Prices

Do you pride yourself on being cheaper than the competition? Are you still charging the same amount as you did a year ago? If you’ve cut costs, examined all aspects of your business for excess spending, and are still struggling to make a profit, it might be time to consider if your prices or rates are too low.

Research industry averages of your industry and make sure your prices reflect that. Also, update your pricing to reflect what customers are willing to pay extra for. For example- biodegradable takeout containers may be more expensive than styrofoam- but your customers might not mind paying an extra $.50 per order for more eco-friendly packaging.

Lastly, make sure you are periodically updating your prices to account for inflation. If this factor is ignored it’s a sure way to make sure you’re actually earning less every year despite having steady growth in revenue.

small business

At the end of the day, the only way for your small business to be successful and sustainable is for you to ensure that you are doing everything you can to make it profitable. There is no shortage of tools and resources at your disposal to make your business succeed, so get out there and get that cash! And the next time you’ve had a crazy month of sales, we hope that you end up with a nice fat paycheck to show for it.

Hire An Experience Bookkeeper

Owning a small business requires a lot of responsibilities, but you don’t have to do it alone. A good bookkeeper will help you wrangle those out of hand expenses, get those account receivables paid up, and ensure you’re maximizing profit.

If you feel like you’re ready to have someone help get your profit back on track, please contact us today for a free consultation.

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