Confused about why your gross profit is high but your net profit is low?
When the ladies get them they look real. But when guys get spray tans they look like Magda’s twin brother from the movie “There’s Something About Mary.” Spray tans last about 7 to 12 days. So if you are into this stuff, you have to go every 1 to 2 weeks. That’s a lot of tanning, and that’s a recurring fixed expense for you. Maybe that’s where all of your money goes.
Do you ever ask yourself: Where does all of the money go? Why do I feel like I have no money?
You are killing it in your business, right? You are bringing in the biz. You think you are making good money. But every month when you look at your net profit then at your business bank account, there isn’t much cash in there.
Every business owner spends money in 2 areas:
*The money you spend to produce/provide a service or product, which is costs of goods sold.
*The money you spend to keep your business up and running, which is called overhead.
Stay with me here. You really need to understand this. It’s so key to getting a handle on your business money. You will have more clarity. You will feel more in control. You could go to the moon! Seriously.
OK, here is an example . . .
Let’s say you are an event planner and you are planning a business conference for Apple. Your fee is $100,000. You will supply and pay for event production, flowers, tables, chairs, catering, and staff. You plan on all of the expenses costing $70,000. So you plan on making $30,000, or 30% profit. The $30,000 is called your gross profit.
Gross profit = Revenue – Cost of Goods Sold
But the event ends up costing you $85,000. You are over budget. So your gross profit is only $15,000.
You also have overhead to run your business. You have to pay for rent, health insurance, your employee, and telephones for your office. This costs $8000 every month.
Net profit = Gross profit – overhead.
So in this case, your net profit is $15,000 – $8000 = $7000. That’s it, you made just $7,000 off of $100,000 in sales!!! Oy vey. We gotta get this number up.
If we annualize this, your net profit for the year would be $84,000. But the thing is, you left your corporate job where you were making $80,000. So you are basically making the same amount of money. Yes, you have more autonomy, have your own company, and have more flexibility. But you are really making the same amount of money.
So something has to change if you want to increase your net profit. You have 3 choices:
*Raise your prices
*Lower the costs to produce the event such as your service or product, or stay on budget.
*Lower your overhead.
It’s that simple. You make the decision. Then run with it. Just not to the tanning salon.
Justin Krane, a CERTIFIED FINANCIAL PLANNERTM professional, is the founder of Krane Financial Solutions. Known for his savvy, holistic approach to financial planning, he advises his clients on how to unite their money with their lives and businesses.
Using a unique system developed from his studies of financial psychology, Justin partners with entrepreneurs to identify, clarify and meet goals for increasing their business revenue. He works with entrepreneurs to create a bigger vision for their business with education and financial modeling.