I am always a little suspicious of the coaches, consultants. and marketers who say they make millions in their businesses because, as you can see from this podcast’s case study, there is a difference between making money and being profitable.
In today’s Goals, Profit & Soul podcast special I am doing a case study on profitability. When someone on Instagram got a little upset because I told her that her business was not profitable even though she had proudly announced that she had $3.2 million in her business (not in a single year) but only showed a $170,000 profit. Where did the rest of that money go?
Let’s take a look at the numbers and define profit, profitability, profit margins and how these overlooked key metrics tell the difference between making money and being profitable. You’ll want to listen to this week’s podcast and look at your businesses’ profitability metrics.
Profit and profit margins are the most important business metric yet no one teaches them (except me) and no one talks about them in the right way
Revenues are not profits – anyone who says this should be disregarded as an experienced, authentic business coach
Revenues are money that comes into your business via sales
Profits are what is left over after expenses
Profits formula is Profit = revenue – expenses – this is accounting 101
Revenue is dependent on sales and how you market your business
Expenses are what you spend in and on your business
Expenses include your salary, cost of running your business, equipment, utilities, and more
Expenses are fixed or variable – marketing is a variable cost, your course platform is a fixed cost
Profits are what is left over after expenses
Sell $100 with expense of $99 your profit is $1.00 This is your COGS – cost of goods sold. It is an important metric in your business as it tells how much you are spending per sale – you want this number to be low so your profits are high
Profit margin is the percentage of profits you can expect based on sales. You want this number to be high. In an online business with few overhead costs and good management of your expenses, you should expect a profit margin of 50% or more
Case study:
$3.2 million in sales
$1.5 million spent on ads
$170,000 in profit
$1.93 million in incidental costs (fixed and variable)
That’s a .05% profit margin and it’s terrible for an online business
What can you expect?
$497 course price x 100 people is $49,700
Costs: $97/month for the course platform $200 marketing
Administration costs for help at $40 per hour, 20 hours is $800. That’s a total of around $1000 in expenses (remember the course platform is a fixed cost which covers all courses in the platform, not just this one)
$49,700 – $1000 = $48,700 in profits that is not an unrealistic number if you have done your pre-sale marketing correctly, meaning you are nurturing your audience, posting on social media, and creating interest in your upcoming launch and sale.
I corrected my math here since I had originally said that there was about $1 million in administrative costs (outside of marketing and ads) but there is actually $1.93 million in uncategorized costs that could represent a host of expenses including administrative, design, support, etc.
In closing, this is not a profitable company. Sure it makes money and it sounds good to say “I made $3.2 million in sales” but when you look closely at the numbers, the expenses, and the profit margin, this company could use some expert advice on how to better manage its profit margins and a profit audit to determine why its profit margins are so low.
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