I want to start off the podcast with the basics.

If you know the concept I’m about to go more in detail already, I applaud you.

And if not, I am not judging.

This episode all about words we use interchangeably in the world of online business.

Revenue versus profit.

What I found is that a lot of times people in online business think of their revenue as profit. But I’m here to tell you that revenue and profit are totally two different things.

Revenue

Revenue is the money that you earn when doing a service or product.

And there are two ways your document revenue.

Cash Based:

Basically what we use an online business and for tax purposes cause as actual cash that is in your bank.

Accrual:

This is revenue in which you have earned, even if you haven’t yet received the cash.

Our friend, Jereshia Hawk coined the terms “booked and banked revenue”.

This makes it extremely easy to understand the difference between the two.

She calls cash based revenue – banked.

And then she calls accrual-based revenue booked. She’s booked it and she knows that she’s expecting it.

Sidenote

It’s super important to understand what invoices you have outstanding. You need to track both the money you’ve earned so you can keep track of what’s outstanding.

Keeping track of your invoices will, you guessed it, increase your bank account!

Expenses

Before you get to profit there’s a journey that happens. That journey includes your direct and operating expenses.

Direct expenses

Direct expenses directly relate to year revenue.

In my bookkeeping firm, my direct expenses include:

• The software that I use for my clients to actually provide the services.

• My bookkeeping staff who helped me produce the service.

Another example of a direct cost are your transaction fees (aka merchant fees). These happen when you’re using Stripe or PayPal.

Direct expenses

Operating expenses help you operate the business. They don’t necessarily directly relate to the revenue source.

But they help everything flowing in harmony.

These can me your software subscriptions, like an email marketing provider.

Other examples are travel, or some fixed expenses and overhead.

Overhead and Fixed Expenses

Overhead are expenses you have no matter what. Whether you make $0 or $10,000 in that month, that overhead in those fixed expenses will remain the same.

If you have a salon or another brick and mortar store, you have rent to pay every single month. No matter how much money you’re making your admin team, they’re the same every month.

Another example is your phone bill.

And then we have something called variable expenses. These vary from month to month

A variable expenses can be like your advertising.

Depending on your business model, chances are you may have ebbs and flows of your ad spend.

Profit

Recap of the Journey

1. Revenue

2. – direct expenses

3. = gross profit

4. – operating expenses

5. = operating profit. And most times net profit

In most small businesses operating profit and net profit are usually the same.

After you get your operating profit, you may have other income and expenses like:

• interest income

• other income

• other expenses

They’re so small that again, they don’t move the needle much when going from operating profit vs net profit.

So there you have it, the skinny on Revenue vs Profit!

I don’t want you to get confused out here. It is not everyone’s fault that feared getting confused about this. But I want to give you some love and tell you that these are two separate things.

In the next episode, we will talk more about what is profit margins!

If you want more visuals, head over to The Major Margins Club Facebook group. I will give you a more in depth overview of how to go over this in the statement called the income statement.

The income statement will give you one piece of your business health.

Struggling with understanding these concepts?! 

The Classy Cash Flow Kit is for you! 

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