Several businesses say they’re making $100,000 or one million dollars in annual revenue, but these claims aren’t always true. I’ve seen this in a lot of different spaces, especially within the coaching world. Big claims look good, after all. But they leave you wondering what information you can trust. As a business growth and profitability strategist, I always encourage clients to break down information to find what’s actually accurate.
For example, businesses often make six-figure claims could bring in $100,000. However, they could spend $40,000 on advertising and $50,000 on operating expenses (i.e. materials, travel, staff, technology and software). So, let’s factor that: $40,000 + $50,000 = $90,000. With advertising and operating costs factored in, this business actually makes $10,000 a year.
Remember, when you subtract your expenses from your income, you end up with either profit or deficit. When your income is higher than your expenses, you’re profitable. When your expenses are higher than your income, you end up with a deficit. It’s that simple.
The Best Way to Calculate Profitability
Most businesses calculate their profitability each month, quarter, or year. But, I found that the best way to calculate profitability is to break it up into functions. For example, websites (or PPC campaigns or SEO) are priced very differently. If each function is profitable, or a percentage of each is, it’s safe to assume a business is profitable overall.
If I charge $4,000 to design a website and my costs are $2,800 (costs could be anywhere from buying font files to website hosting), that $1,200 determines profitability.
Now, if you’re evaluating the profitability of a product, the best strategy is to look at individual units. Factor in your operating costs (i.e. labor, packing, shipping, printing costs) and deduct how much the product needs to be charged to be profitable. If you’re considering wholesale, know your costs. Then you can figure out if you need to increase your charge to make the work and investment worth it. Bear in mind, samples of a product might be sold at cost or slightly below cost. By doing this, businesses attract clients who will eventually purchase a fully priced product.
Time is Your Best Resource
Time will always be your most precious commodity. If you run a service-based business, it’s vital to look at hours of engagement and hours spent on a project.
Say I give a business coaching session for eight hours. Eight hours is a big chunk of my time! If I were to break that time up into four sections, as a two-hour session each time, I know that I have an hour to prepare before and an hour to prep after. A two-hour coaching session + an hour of prep before + an hour of prep after = four total engagement hours. When you multiply four hours by four sections, you get sixteen hours. So, an eight-hour engagement is really worth sixteen hours of work, meaning I should charge for sixteen hours, not eight.
Can You Sustain Your Loss?
It’s normal—totally fine, even—to have different sectors of your business be more or less profitable than others. If I were to lose money on logo design but could capture some of that back in a branding package (and didn’t have a new customer acquisition cost), that’s a business decision I’m willing to make to hit my end goal. Sometimes, business strategy dictates losing money to enhance the likelihood of landing more generous accounts.
If you want to learn more about this process, I encourage you to get curious about the claims businesses make.
For example, in 2018 Tesla’s revenue was $21 billion. (That’s billion, with a ‘b.’) However, their cost of goods sold was $17 billion. If we look even further, we find that their operating income was negative $388 million. Although Tesla looks profitable (and they can say they’re a 10-figure business), really look at the numbers. You may start to wonder if Tesla is a worthy investment.
When looking at your own business, it’s important to think long term. Ask yourself, “Do I have money to sustain my loss?” Business owners require a degree of adaptability and foresight to ensure the evolution, survival, and eventual success of the business.
If you’re investing in a business, purchasing a business, or evaluating the viability of your own business, consider several things. Look into the total income, expenses, and how to lower operating costs and increase revenue before committing long term.
Want to learn more about creating a profitable business? Consider attending ‘align. profit. Impact. – LIVE’ on September 21st in Charlotte, North Carolina, where you’ll learn how to craft a business strategy, create an action plan, and market yourself and your business.