Any business that strives towards success should be making money, or in business terminology, generating profit. One of the main reasons that businesses go under is because of the confusion between two seemingly similar, but in reality quite different aspects. It’s about the famous duo: sales vs profit.
- What do we mean by cash?
- How about profit?
- How are they related to each other?
- Which one of the two is more important for business growth?
I will cover these points in this blog and bring you closer to understanding what really keeps your business going forward. So, let’s start bit by bit.
Sales vs Profit: What is the difference?
Whatever your business type is, there are products and/or services that you are offering to the end customers. Hopefully, they will recognise your worth and buy from you, not just now, but in the future as well.
Now, whenever someone buys your product, you are generating sales. You are piling up the cash you receive from your customers. However, and here is the tricky part, the amount of sales is not actually your end profit. We now come to the sales vs profit part. So, yes, you have received the cash for your products and it may be in your bank account. Technically it is yours, right? Well, that cash only represents the sales you have made.
Now, profit, on the other hand, is calculated differently. In reality, profit is the amount of money that is left from the sales after you cover all of the expenses that your business is facing. This would encompass the production costs, wages and salaries, marketing costs, equipment and rent, and others that fall into this group.
Therefore, it all comes down to this short cash flow story, named Sales vs Profit:
- You generate sales and receive cash.
- You pay out your expenses with that cash.
- Whatever is left is your profit.
The importance of understanding profit
Having made the distinction between sales vs profit, we can talk more about the significance of profit. Namely, profit is a sign of success. It shows that your business is going in the right direction. Sooner or later, you can reach a level when expanding your business is easily achievable. By knowing how much profit you make, you know how well your business is performing. Simultaneously, you can make better decisions about the future of your business. For example, how much to reinvest and in what section of your business to allocate those funds.
Nonetheless, it’s not as simple as it may seem. You need to be aware of the limitations and potential risks. Profit should not be there for you to gloat over it and spend it recklessly. It’s important for you to understand that, yes, profit is your own money and you can do whatever you want with it. But for a bright future, you need to be careful and responsible.
Profit is what helps you move forward. Without a clear understanding of what profit is and how to make the most of it, even the most profitable businesses can go bankrupt.
Conclusion
Sales vs profit is important to know because it will not let you get carried away with unrealistic expectations and hopes for your business. If you want your business to carry on, sustain, and survive, keep an eye on your profit as well as your numbers and bank balance. Cash is the money in your bank account, which is vital for dealing with the costs of running a business, while profit is what gets your business going and opens new doors for you in the future. So, separate the sales from the profit, make the distinction and plan ahead accordingly.
Get in touch with us to find out more about business growth and to see how we can help you with your sole trader and company accounting and tax needs.
Sign up for your FREE trial to Numbers Knowhow, the revolutionary cashflow software designed to empower you with the numbers you need to transform your business. With Numbers Knowhow, you’ll have access to powerful tools and features that will unlock a world of financial understanding and growth.