Revenue VS Profit: Are You Making Or Losing Money?

These offers are everywhere. If you ever looked for ways to make money or start your business, you know what we mean. You find all these marketers: “make thousands of dollars every month!”

It appears on social media too.

“How I made $5K in 45 days.”

“How to become a millionaire.”

“How to build a $10K/month business.”

If those titles hooked you, you might have clicked on some of those videos. Most people, however, feel misled by these promises:

  • You’ll make $5K, but you need a whole system that takes months to create.
  • You’ll create a millionaire business but make less than $100K a year.
  • You’ll start a $10K business, but it may stop working or not be sustainable.

Did they lie to you? Or did they play with your expectations? You see, although revenue isn’t what matters in finance, it does draw attention.

Think about it the next time you find an offer that sounds too good to be true, whether it’s investing, entrepreneurship, or a job. The advertised numbers are probably excluding taxes, cost of goods, and other recurrent necessary payments.

The question isn’t if you’ll make money, but why are you taking the opportunity in the first place. Know the difference between revenue and profits, so that you don’t fall for these mental traps and take only the projects that are worth your time. Who wants to do all that work for such little payoff?

Before we start, it’s important not to see any of them better than the other. This article will show you the pros and cons of both, why they are interdependent, and how to increase them.

Finance 101: Revenue and Profits

Finance 101 Revenue and Profits

Before you choose which one to focus, let’s set the groundwork. In simple terms:

  • Revenue stands for all the money you make. In business, it stands for the total amount your clients pay you. You could also refer to it as the “value” you provide.
  • But you can’t create something from nothing. It takes resources and regulations to make it possible. (Net) Profits show the remaining sum after subtracting expenses. Include production costs, taxes, depreciation, emergencies, among others.

Revenue = Quantity * Closing price

Profit = Revenue – Expenses

The first instinct tells us: what matters is the money we keep, so we should focus on profits, not revenue. But as you can see, the profit equation includes the latter. You cannot maximize your profits without increasing revenue.

That’s why saving alone doesn’t work. If you compare large inefficient brands with small but effective businesses, there’s not that much difference.

In fact, being big and having a lower margin is more dangerous. Although you cannot make profits without revenue, you can make revenue without profiting. But is it sustainable?

Pros And Cons Of Increasing Your Revenue

Pros And Cons Of Increasing Your Revenue

Efficiency does matter in business, except when revenue is close to zero. Unless you make a few thousand dollars a month, there’s really not many things to optimize. 

If a small owner focuses on profits, he won’t find noticeable changes in his finances. Even worse, focusing on profits first could prevent your business from growing, despite how counter-intuitive it sounds.

Let’s see why you might want to boost your revenue:

  • Potential. Revenue shows how much money your business can manage and still make a profit. Having large numbers could mean you create a bigger impact on the world, which may attract investors and talented people to your company.
  • Complete. With the right tracking tools, you can see how many clients you have, how much the average shopper spends, and how often. Because revenue shows every single dollar that entered your business, it becomes easier to build your marketing strategy.
  • “Easy” to increase. Unlike profit margins, there’s no such magic in boosting revenue. With today’s technologies, you can reach more potential buyers by spending only money, not time. Scalability makes six-figure brands go over a million, if not up to $4-$5 million.

Focusing exclusively on revenue has its drawbacks too:

  • Inaccurate. Despite the tracking tools, there are simply too many variables like depreciation, sales volume, or pricing. Even with a fixed profit margin percentage, making more revenue may not increase your profits. How much money is actually yours? It’s a poor indicator of your purchasing power.
  • Only positive. Your revenue never includes expenses. It gives a false impression that you made a lot, or that you end up with less than you should. If you want to make money, you should not create a new income stream without considering profits first. Revenue won’t show the cost of goods, one-time payments, or taxes.
  • Chaotic. What do high revenue and low profits tell you about a business? It won’t be around for too long. Boosting revenue is the easy part: just spend more on ads to bring traffic. The problem is, the inefficiency problem becomes more complex to solve as your business grows. 

Once you handle millions in revenue for little profit, you may find yourself working in the business, not on the business. You become so busy that you can’t innovate, and all will eventually collapse.

That’s why profits are critical. Once you get the best margins, we’ll show you how to increase your revenue.

What Is An Invoice?

As a client, you receive a document from a seller who has provided a service. It includes complete information about price, contact, and product details. Most big brands generally charge your account automatically.

It requires buyers to pay within the first 48 hours, sometimes for the first week. After you deposit, you get a receipt as proof of payment. You should always double-check those numbers and question whatever you didn’t agree with.

These invoices directly tie to the seller’s revenue. However, one can also register profits even when a client delays a payment (only cash-flow reduces temporarily).

Although invoices are not legal documents, all of them must include:

  • The name and address of the client
  • Company name, address, and contact data
  • An identification number
  • A description of the service
  • Supply and invoice date
  • Prices (VAT included) and the total amount owed

Take also a look at what is payment fraud and how you can avoid it.

Pros And Cons Of Increasing Profits

Pros And Cons Of Increasing Profits

Everybody likes making more money, and profits are a big part of it. Instead, we’re going to show three benefits you may not know:

  • Faster growth. In business, speed is fundamental: time is scarce. Interestingly enough, it’s this factor that separates millionaires from the truly rich. More profits mean you can reinvest faster, always anticipating the market.
  • Innovation. Breakthroughs are priceless, but research is expensive and time-consuming. That’s why the best moment to innovate is once your business is making good profits. If you’ve ever wondered why business giants fall despite leading for years, this is why.
  • More competitive. Having thick profit margins allows you to do crazy things in the market. For example, you can sacrifice some ROI to improve a product and beat every other competitor. Or you could use the flywheel model: lower prices bring more customers, which reinforces the feedback loop.

More profits allow you to come up more prepared. For example, one of the craziest Jeff Bezos strategies is “going underwater” with more supplies than everyone else. 

Then, he will drop prices at the point nobody else can make money. He would hold it until everyone goes out of business (or buys them), and once there’s no-one left, he’d drive prices back to normal.

Overall, better margins make you more resilient to market demand, competition, and better relationships with suppliers.

Now, you may wonder: How can there be any disadvantages in making more profits? Without the context of revenue, they are.

  • Context. Sometimes, not making any money today allows us to make more money tomorrow (SaaS businesses follow this pattern). But someone who only focuses on instant profits will reject these strategies, thus never earning as much as they could.
  • It doesn’t make sense for small businesses. When you first launch a product, it will rarely be profitable for the first few months. You’ll find inherent costs related to product launches or building your customer base. You still have to increase your size enough before your profit calculations work.
  • Misleading. Because of it, today’s benefits may not guarantee consistent profits for years. Besides, net profit still cannot include discretionary spending (see HENRYs), which also affects your ability to reinvest. Although it’s better than revenue, it’s neither enough.

Should you work on your profits, revenue, or both? If so, which one should you do first?

Whether you chose one or the other, we’ve prepared a simple guide on how to boost both:

6 Ways To Increase Your Revenue

Increase Your Revenue

More revenue means more profit potential, and it’s usually the right way to start growing your business.

  • Paid Traffic. Your only problem as a new business owner is getting clients. Although you do want to build an audience organically, it may take you longer than the time you have. With paid traffic, you can buy ads and offer referral programs. You let others market the brand so that you can focus on the business. The better you target your customers, the better conversions will be.
  • More Marketplaces. If you already have a business but don’t know how to reach more people, think of selling in other countries. It may be easier than you think with a service-based business that operates 100% online. Just don’t make the mistake of thinking it’s going to be as easy as replicating your business. Each country has different competitors, market interests, cultures, and regulations.
  • Offer Perks. Some platforms base your ranking on the number of sales of visits you get. If you don’t mind reducing your profits for a while, you could add discounts and rebates to drive more sales/visits and position on search engines. Remember the flywheel system.
  • Multi-Platform. Straightforward: more marketing spaces mean more clients and chances to sell. You do want to appear on as many as possible, but remember to do it one at a time, only after mastering the previous one. Each platform has its “language” and audience, and you wouldn’t gain much if you just copied the same offer on other websites.
  • Hire and delegate. You won’t find this tip on other websites because of how indirectly it affects your revenue. It may at first look you’re just paying someone else to do the same task. In reality, you’re specializing in your team so that each member produces top-quality results. You also get more free time to innovate and increase profits, which increases the chance of revenue.
  • Leverage other sources. It sometimes costs money to make money, and without profits, things move slowly in business. Luckily, if you have another income stream (like a job), you can invest those savings and speed things up. It’s a very common practice among software entrepreneurs to build cash-flow businesses to fund their tech brands.

In short, you boost your revenue by reinvesting.

How To Boost Revenue With A $1/Year Salary

How To Boost Revenue

Would you run some of the biggest companies for one dollar a year? It seems many world-class executives are more than happy with that salary. They certainly don’t have low-income lifestyles, so what aren’t they telling us?

Why Would Anyone Accept The One Dollar Salary?

As a business owner, one has the purpose of making the company as successful as possible. Since we talk about money, these professionals have to make more sales and optimize expenses. 

For committed CEOs, every dollar matters. Business growth isn’t only about being profitable, but taking the net profit and reinvesting it back into the company. For every dollar that you compound, it generates exponentially more value over time.

But that’s not always the case. That’s why executives only pay themselves $1 if they believe their market valuation is going to rise. And if it doesn’t, they are the first ones to lose.

As an employee who searches for a stable income stream, this wouldn’t be ideal. But as the decision-maker of the company, it makes a lot of sense. Why spend money moving it from one place to another if it’s going to end in the same place?

The short answer is, yes. It helps the company to save money on taxes and brokerage fees. Yet, it’s 100% legal as long as you don’t pay $0. If companies had to pay these CEOs their actual net worth, it would greatly limit their growth.

What’s The Catch?

The business owner has the most decision power in the company, among other reasons, because they own the most of their stock. 

Since they’ve been there from the beginning and always stay in the market, they get the best returns. Of course, it’s their responsibility to make sure valuation increases, which makes them active investors.

It doesn’t mean they drive prices up all the time. But they don’t mind if reinvesting in the company will cause the price to drop because the long-term projection will be positive.

Is it good or bad to set $1/per year? It’s convenient and legal. Although tax evasion is not acceptable, tax avoidance is. By law, one has the right to save as many taxes as one can, if that means taking advantage of legal loopholes.

How The $1 Salary Makes The Company More Valuable

The one-dollar salary does have a psychological trick behind.

From the CEO perspective, you don’t get paid if you don’t make the company work. It requires you to be all in, and that sense of commitment makes people more resourceful.

What happens to the public is even more curious. Investors find out the executive pays himself $1, which means the CEO is confident in the company. If an insider thinks the value will go up, many investors will start to believe it too and join the movement.

Here’s a controversial example. The CEO of Zynga, Mark Pingus, followed the $1 salary as well, which was a vote of confidence. However, the corporate decisions he took put the company at risk many times. Is it a reliable executive?

Later, when the stock reached an all-time high of $14, Pingus sold his stock, which then dropped it to $2. Imagine how investors reacted!

The question is: do you believe in the team behind it? 

Although one shouldn’t base investment advice on other people’s opinions, business leaders have played a fundamental role in the company’s growth.

6 Ways To Increase Your Profits

Ways To Increase Your Profits 1

Although increasing margins isn’t easy, it’s definitely not as hard as starting a brand new business. Now that you have all the sales momentum, it’s time to make it profitable. Only then scalability will make sense.

  • Go Big. Contradictory, isn’t it? We’ve said more revenue makes it harder to maintain profits, but that’s only true if your business lacks structure. With the right plan, you can increase profit margins by growing your business.

As a retailer, you might want to order more a larger inventory now, which will get you a discount with the manufacturer. As a salesperson, you may want to consider putting your effort on high-ticket offers, not low-ticket. You’ll find out that making $100K takes nearly the same work as $20K.

  • Take more control. Since you create the product until a client buys it, there could be multiple phases, each of them involving a different entity. The problem is, intermediaries take away a chunk of your profits. Plus, when you rely on so many sub-platforms, you run the risk of losing the business if anything goes wrong with them.

Is there any way you could do the process independently, even if it cost more at first? It’s essential for consistent growth.

  • Give priority to services and software. You can only offer so much value with a physical product. Software and services are much easier to scale, have a lower cost of goods, and higher multipliers (market valuations).

Best of all, they are tied to perceived value, meaning your ideal customer will easily justify spending more on a polarizing company. 

  • Create a brand identity. Rising prices are a simple but risky way to increase your profit margins. You won’t be able to justify it to your clients unless you turn your business into a distinguished brand. What do people think when they hear of your name?

It could be status, security, even an ideology. Give people a story they can relate to, and they will choose you, even when competitors come up with better products. That doesn’t mean you should stop innovating if you want to keep that image. The best examples? Apple, Nike, Starbucks.

  • Work on your relationships. If you’re informed, we won’t need to tell you how high advertising prices have become. Client acquisition costs have risen to the point front-end sales don’t work. Are you really going to sell a $199 course worth $50 because of your ad spent? Customers can’t see the value.

Well, who said they only need to buy once? Yes, you can use low prices as a strategy to make people keep coming back. You can leverage email marketing and strengthen those relationships with email sequences. The question isn’t if it’s profitable, but when will it be. 

Say the average lead buys a cheap $50 product and stays on your list for six months. But before leaving, they might have bought a high ticket product of $1000. Your lead-to-value (LTV) becomes $1050, which is your maximum acquisition cost. You can now be more aggressive on ad campaigns because of this long-term strategy. As more people sign in, this number turns more predictable. The solution is remarketing.

  • Smart Saving. Once you apply these techniques, you may be making so much profit that you don’t know how to use it, so you just store it. Instead, invest it in a passive income source to prevent depreciation, perhaps getting even more ROI. 

Aditional saving tips may include hiring a tax specialist to take advantage of your situation, or at least avoid paying more than you should.

By this point, you would have maxed out your net profits. If you want to make even more, consider adopting financial minimalism until you reach the income level you want. For example, keeping a simple lifestyle helps to reinvest money and generate wealth faster.

The Bottom Line

Revenue or profits? Focus on one variable at once, each of them at the right time. Start increasing your revenue, and don’t worry about making money first.

It’s okay not to make any money today if that ensures more profits in the long term. Losing can be a strategy.

But no matter what strategies you use, what matters is the amount you keep, especially the factor your statements don’t include: your financial accountability. What you do with those profits is up to you, and it could mean the difference between business success and failure.

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