Are you lying to yourself about your business finances?
If you are, you probably aren’t doing it on purpose.
It can be all too easy to be deceived by your business numbers if you don’t know what numbers matter or how to interpret them!
And the truth is– you’re absolutely not the only one! While most small business owners manage their own finances, the majority of them don’t feel confident when it comes to things like cash flow and profitability.
In fact, when we first start working together, many of my clients return a blank stare when I ask them this simple but critical question,
“What’s your current profit?”
And while I never expect anyone to have a perfectly specific answer ready (it can fluctuate all the time), it is essential that as a business owner and the CEO of your creative business, you at least have a ballpark idea of your profit margins.
On the other hand, some business owners are quick to answer this question with incredible confidence and pride,
“We’ve brought in 6 figures this year!”
This may sound fabulous (don’t get me wrong, achieving this kind of sales milestone is absolutely worth celebrating) and looks impressive on paper, it often requires a little digging to get to the cold hard truth.
I know it may not seem like it on the surface, but bringing in 6 figures, and bringing in 6 figures of pure PROFIT are two entirely different things.
And if you don’t know WHY they’re so different, it’s time to clear up this common misconception once and for all!
Ready to uncover the truth so you can finally understand your business numbers, set realistic, data-driven money goals, monitor your progress, and confidently make decisions for the future of your creative business? Keep reading as I guide you through the process of taking a closer look at your finances so that you can set your creative business up for TRUE success!
Profit and revenue are two of the most commonly misunderstood terms in the business world.
It’s the reason I dedicated an entire blog to differentiating the two. You can read it here!
Let’s break it down:
Revenue is the total money your business is bringing in BEFORE expenses. To get this number, you simply add up every sale. But when you ONLY look at this number, you’re fibbing to yourself– plain and simple.
Profit is the total amount of money you actually make when all is said and done. This is the number you calculate after expenses. You find this number by subtracting your costs from your revenue.
Why does this matter?
It matters because when you mix up revenue and profit, it can poorly sway your judgment and business planning.
If you are blind to the truth, you may THINK you’re “taking home” more money than you actually are.
Believe it or not:
I’ve seen businesses that bring in 7 figures each month and ARE NOT profitable. If you’ve ever watched the WeWork show on Apple TV you’ve witnessed a prime example!
Alternatively, I’ve also seen really lean (often solopreneur) businesses that bring in almost ALL profit. So while their “less impressive sounding” $2k, $5k, or $10k month may seem modest next to the other business’ hefty 7-FIGURE month, in reality, they are more profitable (and in some senses, more successful)!
When you know the difference between revenue and profit, you can protect yourself and your business, both on an internal and an external level.
Moral of the story?
When it comes to your business numbers, PROFIT is what matters above all else.
So what should you do with this newfound financial knowledge?
Here’s what you can take away from this insight and apply to your creative business immediately as you get honest about YOUR business numbers!
Now, by no means do I want to discourage you from investing in your business– it’s so important for your growth as a business and as an entrepreneur.
However, I do want to encourage you to be critical about WHERE and with WHO you invest. It’s essential to use a discerning eye and collect the info you need to see through some of the smoke and mirrors (and that oh-so-prevalent toxic marketing) so you can invest wisely, be fully informed, and make strategic decisions for yourself and your business!
Be sure to take ALL marketing numbers – especially the big, splashy ones that don’t include receipts – with a grain (or two) of salt. If you’re considering working with a business coach, proceed with caution if they are marketing their services with big numbers WITHOUT evidence to back up their claims.
They aren’t necessarily trying to deceive, but then again, they might be. These business owners probably subscribe to the “you gotta spend money to make money” ethos, which in many cases can be true, but they may be spending LARGE amounts of $$ just to show a LARGE $$$ in sales.
If authenticity and sustainability are what you’re after, steer clear of these folks, or at the very least be sure to ask plenty of questions!
When assessing (or sharing) your own business numbers, keep in mind: sales numbers usually refer to REVENUE numbers, not profit.
Because everyone wants to appear as successful as possible. And the bigger the number, the easier it is to claim success. But stretching the truth for appearance’s sake isn’t the way to go.
If you share your revenue numbers in your marketing (it’s not my personal fave, but you do you), I encourage you to be truthful and transparent. Be sure to clearly state what numbers you’re sharing (i.e. revenue vs. profit) instead of throwing out vague numbers and leaving it up to your audience to interpret (and often jump to the wrong conclusions) about what that number truly means.
Finally, have a system in place to manage your money! Cash flow is the total money flowing both in and out of your business. What this means is, even if you have SALES you aren’t always guaranteed to have CASH in hand. When this happens, you may not be able to keep your business afloat.
Unfortunately, cash flow is a HUGE reason why most small businesses close! When you understand where your money is coming from, where it’s going, and how much you have access to at any given moment, you are better prepared for unexpected seasons in business. This will set you up for the long haul!
Now that you’re armed with the inside scoop on financial jargon for your business and how that can protect you as both a consumer and an entrepreneur, it’s time to look at how getting honest with your numbers can help you be the best CEO possible for your creative business.
If you’re only looking at your sales or revenue numbers, you’re never really going to know what is or isn’t working in your business.
But, once you start paying attention to the “fine print” details like your profit & loss statements, your cash flow statement, your product inventory, as well as your sales and conversion data, you can analyze this information and make informed decisions moving forward instead of just winging it or making assumptions!
Once you know the truth about your business finances, you can set more realistic goals for the future based on accurate information.
Think of it this way:
Instead of continuously blinding yourself to the truth and setting unrealistic goals (aka setting yourself up for failure), going into your goal-setting with eyes wide open can make all the difference!
Plus, when you’re regularly looking at things like your expenses, taxes, team member salaries, cash flow, and profit margins, you can look for creative opportunities to save money, cut unnecessary costs, and be more efficient with your finances!
Who knows…maybe once you’re armed with that data you CAN in fact reach that 7 figure goal sooner than you ever imagined!
When you get honest about your business numbers, not only will you be able to stay on the pulse of your business and set more achievable goals, but you’ll ALSO be able to measure your progress along the way.
You shouldn’t be holding your breath until the final hour, waiting for those end-of-year reports before you know if you’ve met your money goals! This is NOT the time or place for surprises.
Instead, you can put simple but powerful methods in place to regularly track and respond to the health of your business finances.
I recommend doing this by creating a money system.
With this plan in place, you’ll never again be left scratching your head when someone asks you,
“What’s your current profit?”
That kind of confidence as a CEO is priceless.
We’re in the midst of tax season, so you probably have money stuff on the brain now more than ever. And while I’m not an accountant, I do have a ton of tried and true resources to help you get a grip on your business finances.
Check out these past blogs if you’re in the money zone and want to step up your financial game this year!
Financial Disclaimer: Please note, I am not an accountant and this information is not intended to be financial advice. Instead, all information, content, and materials available on this blog are for general informational purposes only. This is why I highly recommend hiring an accountant ASAP for your creative business. They are tremendously valuable resources and can guide you to make informed decisions for your unique business needs.