Sales and profits are two distinct things to monitor in a business. As entrepreneurs, we always try to find ways to increase sales to increase profits and business growth. However, focusing only on sales won’t necessarily translate into a higher profit margin for the business.
Let’s first see what these two terms are, what they mean, and how they differ.
A definition of Profit is – a measure of business performance.
You can further define this performance as Gross Profit and Net Profit.
Gross profit is the difference between your business revenue and the cost of goods sold, including all expenses incurred in producing goods or services sold in a given period.
For example, if the cost related to you providing the products or services you sell is £100,000, and the revenue you earned by selling those products or services is £120,000, then your gross profit would be £20,000 (£120,000 – £100,000).
Gross Profit can be used as a general indicator of your company’s health and its ability to continue growing. In addition, Gross Profit can be monitored in Yocory through our free Profit Monitor tool.
Net profit is the amount of money a business brings in after all the costs associated with its operations have been accounted for. You can calculate the net profit by taking revenue and subtracting the cost of goods sold, the operating expenses, and the taxes.
A definition of Sales is – the value of goods or services sold in a given period of time.
You can have different income streams for your business, and all those sales will add to your business’s total revenue for a particular year.
Ideally, you want to track your business sales in relation to your services or products. The objective is to understand their trend. Can you find factors or events that play a part in the success of your sales? Tracking your sales will help give you a better insight into customer behaviour and can be used to help you take business decisions in the future.
Ideally, you should set monthly, quarterly and annual sales goals to help you with growth and accountability. Are your sales increasing, decreasing, or are they stable? If sales are stagnant, you will need to consider why this might be happening and what changes can be made to improve the situation.
In Yocory, you can do that by using our Sales Tracker (one of the free tools included in the Free Account).
Sales don’t translate directly into profits
From the profit definition, it’s straightforward to understand that sales are only one part of the profit equation. To maximise profits for your business, you need to understand both sides of the coin – sales and costs.
So, what can you do to maximise profits? First, you must remember that increased sales don’t necessarily mean increased profits for your business.
You can’t simply increase your sales without considering how much you’re spending on marketing and operations to ensure that you’re not spending more than you’re bringing in from your sales.
It would help if you focused on maximizing sales while monitoring your costs and finding avenues to minimise them to boost your profit margins in the long run.
Focus on quantity or quality sales for better profit?
The decision on what to focus on can be challenging for business owners. On the one hand, increasing your sales volume will allow you to generate higher revenues and more profits. But on the other hand, focusing your efforts on improving the quality of your products or services will ensure that you build a loyal customer base that will purchase from you again.
When going for volume, consider overheads, systems and other production costs. These costs will scale as your sales volume increases, so it’s crucial to ensure they are as streamlined as possible, so they don’t eat into your bottom line. In this case, you will probably need a good sales strategy as it becomes a numbers game.
Instead, quality will require a more long-term strategy to achieve lasting success. Focusing your efforts on improving the quality of your offering will help you build a strong reputation among your customers, resulting in repeat purchases and increased customer loyalty over the long term. In this case, you will need to consider your inbound strategy, making sure your channels are ready to receive enquiries and your content marketing is in place.
There isn’t a right or wrong approach; ultimately, you will need to decide which system will be the most effective for boosting your business’s profitability over time.
Limiting expenses to increase profit
Monitoring your expenses is the most effective way to improve your profit margins. Identifying areas where you overspend and then finding ways to reduce these costs is the key to boosting your profitability in the long run.
First, look at the costs of your products or services – for example, raw material costs, labour costs and other expenses related to your production processes. The further upstream you can find ways to reduce these costs, the more impact it will have on your profit margins.
Reducing the expenses directly related to your products or services will directly impact your gross profit.
Right after this is taken care of, you can try to increase your net profit by reviewing all your fixed expenses (e.g. overheads, rent and subscriptions).
Taxes are something you can’t control, but you can make sure your tax efficiency is done correctly by asking your accountant for a yearly checkup.
How to monitor your business profit
Monitoring and measuring your success is essential to ensure you’re on the right path.
Gross profit is the metric that can show if and how your customers value your product without considering the costs of operating the business.
Understanding the above can help determine if your product or service is profitable.
In Yocory, you can enter your gross profit yearly goal in our Profit Monitor. Then, by adding your sales and expenses to the relative trackers (Yocory’s free tools included in the Free Account), you automatically get the profit breakdown by quarters and months.
Understanding the yearly trends helps to manage the business.
You can make forecasts based on the data displayed to plan the future budget and use the info to make more informed decisions. For example, when you require to add more resources to the business, when you can invest in new equipment or when you need to outsource certain activities to improve efficiency, you can base your decisions on the historical data available.
Financial projections can also help when in need to ask for financial resources if you decide to expand the business or enter new markets that require more significant investments.
- Focusing on sales won’t necessarily translate to profits because fixed and variable expenses play a significant role in the profit calculation.
- A sales strategy combined with a cost management strategy should be implemented to improve profitability.
- Gross profits can help you understand your offering success among your customers and, by comparing it to your sales, it can also provide insight into where you can cut costs to increase margins and improve profitability.
- Gross profits can be increased by streamlining production and reducing waste within the production process, while Net profits can be improved by managing and cutting fixed costs.
- Make sure to have goals and monitor your progress regularly to understand how well your business is doing and what you can do better.
Cheers to more profitable businesses all around!
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