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FOUR KEY FACTORS OF PROFIT: BREAKING DOWN THE BUZZWORD.
Hey Founders,
The word "profit" holds immense power, yet it is often thrown around casually, like confetti in a parade. We encounter cliché captions every day emphasizing profit, but what does it truly mean, and, more importantly, why is it so important?
As a lender, reviewing countless business plans and cash flow statements revealed that many Founders were unaware of the difference between gross and net profit. More concerning was the lack of comprehension regarding the importance of generating a healthy net profit, with many proud to point out they were breaking even.
Net profit is the lifeblood of your business, capable of steering it toward prosperity or leading to its demise. It's time to peel away the layers and discard the nonchalant attitude often associated with it. Let's explore the relevance of profitability and why it's pivotal for your business.
DIFFERENTIATING GROSS FROM NET PROFIT
Let's first distinguish between gross profit and net profit. Gross profit is what remains when you subtract direct costs from revenue. People often discuss profitability in terms of gross profit because that's where the positive results are typically found. On the other hand, net profit is derived by subtracting indirect costs or operating expenses from gross profit; it's also known as the bottom line.
THE IMPORTANCE OF NET PROFIT: A FOUNDER'S LIFELINE
Understanding the significance of net profit is crucial. Net profit is a founder's lifeline, not for personal gain, but for constructing a sustainable and resilient business. It provides the ability to replenish emergency funds, grow equity, pay down debt, invest in assets, expand the business, and enhance the overall value of your company – both short-term and long-term. Without net profit, none of these endeavours are possible. This is why net profitability is the driving force behind your company's sustainability.
PROFIT WITH PURPOSE: MAKING A POSITIVE IMPACT
Beyond fortifying the company and increasing its value, net profit allows us to make a significant contribution to the communities we serve. It enables us to fund charitable causes, build hospital wings, and start our own foundation to champion causes we deeply care about. Businesses, through profitable practices, have the influential power to be forces of good. You are anything BUT small, dear Founder!
PRIORITIZING PROFIT: PUT A STRATEGY IN PLACE
The bottom line should be your top priority. Unfortunately, many founders leave their net profit to chance, lacking a strategic plan to ensure it's nailed down. At Nail The Numbers, we work to help founders prioritize profitability by reverse engineering the budgeting process, starting from the bottom up, we call it the Financially Fierce Formula.
THE BOTTOM LINE IS THIS...
Profit isn't just a term to be tossed around casually. It's a commitment, a responsibility, and a promise. The next time you find yourself in the sea of profit talk, don't just float along – dive deep, ask questions, make informed decisions, and plan for it. After all, your future depends on it.
ABOUT TAUNYA WOODS RICHARDSON
Taunya is well-known for her straight-shooting, bottom-line-building approach to founder finance. As the Founder of Nail The Numbers, she brings 30+ years of experience in entrepreneurship, finance, and neuroeconomics to our mission of strengthening the minds and bottom lines of Founders across North America.
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