Profit is the goal of any business entity, but I am amazed at how few Internet business owners even understand what profit means.
I often offer consultation services for new or struggling Internet businesses. One of the first questions I ask them is if they are profitable yet.
It is a simple question with a yes or no answer. But I hardly ever get a yes or no answer. The person I am working with simply doesn’t know what the word “profitable” actually means. So they answer based on their vague definition of “profitable” which in their mind is a subjective concept.
Profitability is certainly not a subjective concept. It has a very solid and widely accepted definition and I am not the only person who will ask you that question. That means you must know the answer.
In addition, it is your goal to attain profitability and then to maximize the value you return to the shareholders of your business. Your goal in creating the business was to improve your customers’ lives in some way, but the business keeps score on your ability to meet that goal using “profitability” as its only measure.
Let’s define profitability so you can confidently know if your Internet business is profitable. You will also then know what factors are used in calculating profitability so you can adjust those factors to make your Internet business profitable faster.
Profitability is simply your revenue minus your expenses. If your revenue is higher than your expenses, then you are profitable. If your revenue is less than your expenses, then you are not profitable. It is as simple as that.
Profitability has absolutely nothing to do with how much cash you have in the bank. You can have a profitable business with zero cash in the bank and you can have 10 million dollars in the bank and not have a profitable business.
Profit has nothing to do with what you owe to creditors. Your business can be 100% debt free and have 10 million dollars of cash assets in the bank and still not be profitable. It can also owe 100 million dollars to creditors with no assets to cover those debts and still be a profitable business.
Profit has nothing to do with assets or liabilities at all.
It also has very little to do with cash flow. You can sell 10 million dollars worth of products every single day and not be profitable. You can sell one product a year for $10 and be profitable. While it is impossible to be profitable without some cash flow, amount of cash flow has absolutely nothing to do with whether you are profitable or not.
Assets, cash-on-hand, liabilities, net worth, cash flow and revenue are all important metrics in a business, but every single one of those metrics can be changed at will if you are profitable.
If you are having cash flow problems because you need to spend $10 million to fulfill a new large order that you won’t be able to bill until six months in the future, then you can get a bridge loan if you are profitable. If you aren’t, then a lending institution is going to wonder if you are going to spend $10 million to earn $7 million like you have in the past due to your record of not being profitable.
If your business has more debt than assets, then you can fix that if you are profitable. Over time, you can pay down those debts.
Profitability is everything. And it is very simple to calculate. You simply subtract your expenses during any particular period of time from your revenue.
A loan is not revenue. Receiving payment from a customer for a product order is revenue.
Expenses in an Internet business can be trivial. Beyond domain registration, hosting and payroll, many Internet businesses have no expenses.
Do the calculation. You will need to do it anyway to make the tax man happy. Find out if you are profitable or not without all of the distractions of the cash flow, asset and liability numbers.
If you have an accountant, simply ask for last month’s Income Statement. If the number at the bottom of that report is positive, then you are profitable. If it is negative, then you are not profitable.
By the way, the term “the bottom line” comes from that very exercise. The bottom line of your Income Statement (also sometimes called Profit/Loss Statement) is your profitability. It is on the bottom line of the report. And it is the bottom line in any Internet business or any other business for that matter.