It’s important to know the distinction between different types of money that affect your business if you own one, or plan on starting one. Read on to learn the importance of revenue, cash flow, expenses, profit, timing and how to get it right to get rich!
Types Of Money In Business
Even if you’ve never seen the movie, you’ve heard the famous line from Jerry Maguire, when Tom Cruise screams, “Show me the money!”
That might as well be the mantra of every business person, yes? Remember my blog about becoming the master of your life? We aren’t in this to ‘get by,’ for a hobby or a part-time side project. Our goal is to commit to going all out and to get rich doing it.
When you get your business off the ground and money starts coming in, you feel good and like you’re going somewhere, right? Well, yes, but there’s more. There’s an important distinction between the types of money involved in your business.
Revenue Vs. Net
The problem is most business owners don’t know the difference between money that comes in and money that’s always available. It’s such a small distinction, but it makes a huge difference. Even so, many business people don’t get it, and that’s why their business becomes their job instead of their money machine (and that’s if they even make it past the first 3-5 years).
You have to make some clear distinctions about the money that’s coming into your business. Most people only focus on revenue. Is that important? Absolutely! But rich business people focus their attention on more than just the money that’s coming in. There are other areas that must be addressed in order for a business to grow like expenses, cash flow, and profit.
Revenue does not equal profit. The average person in business says, ‘Okay, how much money came in today?’ and that’s it. They don’t even know what their expenses are, and they don’t realize how big of a role expenses can play in your bottom line, your profitability.
Bring in cash flow that is more prevalent than the expenses, and then you can start to spend some money! -Harv Eker
Know Your Net
If your business has a 20 percent net, that means out of every dollar of revenue, 80 cents goes to expenses to run the business, and 20 cents is left. You have to multiply every dollar you spend by either five or ten to account for expenses. The fastest way to blow up your business is with expenses and by not properly calculating them.
Secondly, you have to consider timing. There is a big difference between money coming in and money that will be coming in that leads to cash flow! Most people run into trouble because they can’t pay their expenses, let alone generate cash flow for further investing back into the business to grow it.
And that’s not necessarily because they don’t have the sales or revenue. It’s because that revenue hasn’t come in yet, but the bills sure have. By far, more businesses go under because of poor timing than due to poor sales.
If you get paid after you’ve delivered the goods—that might as well be like raking nails across a chalkboard to my ears! There are established companies that do that, but first, bring in cash flow that is more prevalent than the expenses, and then you can start to spend some money!
There’s revenue, cash flow, expenses, profit, and timing. Get this right, and you’ll get rich.
Now it’s your turn! Do you have stories about learning these lessons firsthand? Most business owners have experienced this in one way or another when trying to make a profit. Share your insight in the comments!