Why Profit Is Hidden in Your Expenses
Profit by definition is the amount of income or revenue you have left over after you’ve paid all the expenses of the business.
The one number that is touted as ‘the number’ to focus on is income. Let’s face it; it’s an easy number to keep track of. You can easily tally up your sales for the day, week or month. In fact, you can check the figure with the push of a few buttons in your accounting system. No need to do any calculations, there it is a dollar figure staring you in the face.
Whether you’re starting out in business or have been in business for years, the measure of success is often the quantum of income. There are bragging rights to be had when you can say you’ve cracked the $500K or $1M turnover figure. It’s a financial goal that seems easy to deal with and focus on.
I remember one client setting their goal of $500K for the year and getting to $480K, so close and yet so disappointing that they didn’t quite make it. I’ll confess to using this myself, every year increasing the number to push myself just that little bit more. Some years I make it, some years I don’t, and for me, that’s ok, because it isn’t the only measure of my business.
Because profit is a combination of many different numbers, it’s a harder number to come to grips with, and whilst there’s no reason not to put a goal figure on profit, it’s common to miss the target. Why? I believe it’s because of what makes up your expenses.
You have missing profit that’s hiding in your expenses, and you don’t even know it.
One of the biggest mistakes I see is when you have a bookkeeper looking after your accounting records which means that you’re no longer scrutinising every single expense. The issue arises significantly with expenses paid on credit cards.
You see it isn’t the bookkeeper’s role to question what you spend your money on; their role is to record what you did spend. When was the last time that you looked in detail at the expenses on your credit card statement? Do you even get the statement anymore? I know one of the major banks is encouraging their customers to eliminate the paper statements.
When you look at your profit and loss statement, and I hope you do each month, you’ll see the expenses listed in alphabetical order with various headings that don’t give you the detail of exactly what you’ve paid.
Chances are you’ll check the income to see whether you’re on track with your goal for the month. Then you’ll glance over the expenses thinking they are what they are and then you’ll look to the bottom of the page to see what the profit was for the month, and hopefully it is a profit and not a loss.
My guess is you won’t ask for details about any of the expenses unless there is something that you think looks wrong.
So, another month rolls on by with the same expenses being paid without thought.
My advice. Look carefully at the expenses paid on your credit card and make sure that you’re not paying for expenses that you don’t need.
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