Are you an IT professional who runs their own business? If so, then you know how important it is to be financially healthy. Revenue and profit are two crucial metrics that every entrepreneur should understand.
A business owner could be leaving money on the table or even putting the business at risk if it is unknown to how income and profit is generated.
While revenue is important, profit is the ultimate goal of any business as it represents the actual income that the business owner can use to reinvest, pay themselves, or grow their business.
Managing the relationship between revenue and profit can be challenging, and requires careful management of both inflows and outflows of money to ensure a healthy bottom line.
Revenue vs Profit
The first thing to understand is the difference between revenue and profit. Revenue is the total income generated through sales. In our case, we generate most of our sales from consulting and reselling network equipment.
We have project-based consulting and monthly recurring managed network services. We resell network hardware from major vendors such as Cisco, Juniper, Palo Alto Networks, and others.
On the other hand, profit is the income remaining after subtracting operating costs, debt, taxes, and other expenses incurred of generating revenue. This is also known as net income. Gross profit is the total income minus costs directly associated with revenue such as cost of goods sold.
Building for Profit
It’s important to build your business model with profit in mind. This means rethinking your finance models and finding ways to increase profitability.
For example, you could cut costs by eliminating unneeded software subscriptions and other unnecessary expenses. You could also increase revenue by raising your rates and adding additional value to your service offerings.
After all expenses, our net profit increased 133% compared to 2021.
Reviewing Finances
To gauge your business’ financial health, it’s important to review your profit and loss (P&L) statements on a regular basis. This will help you identify trends and make informed decisions about your business. You should ask yourself questions like:
- What is driving sales?
- What drives profit?
- How can we generate more profit? What decreases profit?
- What expenses are needed to support profit?
- What is our profit margin and what should it be?
- Do we generate enough profit to support ourselves and the business?
We typically have net 30 terms (Accounts Receivable) set up with clients but we do require 50% up front for any services-related projects.
Our professional services accounted for 32.7% of revenue. Manage Network Services accounted for 17.6% and reselling activity accounted for 44.2%.
With our services, our direct costs is labor. That is me doing the work to complete projects. Our cost of goods sold accounted for 27.5% of revenue which included subcontractors and equipment purchased for reselling purposes.
Improve every quarter
Finance is a crucial aspect of running a successful small business. By understanding the difference between revenue and profit, building for profit, and regularly reviewing your finances, you can make informed decisions that will help your business grow.
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