Introduction

Welcome to another weekly episode of ‘I Hate Numbers’.  The podcast that wants you to get acquainted with your best Business Friend.  The friend that won’t lie to you, the friend that you need in times of turbulence, times of calm and times of prosperity.  That friend is your numbers.

Where profit is, loss is hidden nearby, Japanese Proverb.

In this week’s podcast I look at profit, and then go one step further and talk Gross profit and Net Profit.

Importance of Profit

Your business journey map should have profit as a destination point.  If your destination is set for sales alone, then change your route or abandon your journey, it’ll end in tears otherwise.

Cash is pretty important as well, sales though, well it’s like ‘all fur coat and no knickers’

Gross Profit and Net Profit

In the world of numbers Gross doesn’t mean unpleasant or disgusting - though making a rubbish gross profit is. In this podcast I talk about Gross Profit and the relationship it has with Net Profit.

When you set your numbers dial to profit, refine the calibration and mark it in terms of Gross and Net Profit.

Gross Profit and Net Profit, understand them and keep an eye on them if you want your business to carry on, survive and thrive.  If you don't do this then you are missing a trick, and your business can suffer and lose money

Revenue is Vanity, Profit is Sanity, Cash is Reality

“Don’t waste all your energy and focus on sales alone, shift your thinking to think about your profits” Mahmood Reza

Who doesn’t love making a sale? I certainly do.  It’s like a legal dopamine rush, that elation and feeling of happiness.  Be very aware though.  If you are not making profits, then that feeling of happiness can quickly make you feel like you want to pull the head off  a teddy bear, or punch Bambi.

If that trend continues then all those dreams of yours will stay unrealised, unfulfilled and in the distant horizon.

What Next

Think profit, more than sales if you want to make your business to survive and thrive.

A virtual high five from me for listening. Subscribe to the podcast so you don’t miss an episode.

Pro Active Resolutions

The Numbers Crew – Spreading Number Loving Care!

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business--Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. It's Mahmood here on another episode of I Hate Numbers. The show that wants you to connect and be comfortable with your best business friend there is. Who's that best business friend? It’s your numbers. Your numbers aren't going to lie to you. They're going to be there by your side in all manner of things,

when things are good, when things are not so good, and when things are in between the two of them. In last week's show, we talked about cash. We talked about that commodity that keeps the wheels going, the cash that you need to keep the business going through, when things are rocky, when things are prosperous, when things are calm. You've got ambitions for growth.

You need that cash to keep coming into your business to keep the wheels going. Now, apart from that, what we need to remember is though, ultimately, whatever your business is, however big, however small, whether it's a side hustle, whether it's a freelance business, or a big conglomerate here, you've got one thing you've got to really factor in to how that business is going to look, and that's going to make profit at some point here. If you haven't got profit factored into your goals, if you haven't got profit factored into what you're doing, then all you've got on your hands is a very expensive, time-consuming hobby.

Now, let's get real here. So, there are going to be times, it might take some time to actually make a profit. Today's podcast is about how we know what profit is, how we measure it. So, to make sure that things keep going, things keep turning, we need the cash coming in. Sales, by the way, as I’ll remind us again at the end of this podcast, are effectively a bit of vanity and a waste of time, and it's not for anything

the old cliche that comes out that says, revenue is vanity, profit is sanity, and cash is reality. So, for me, in your business, the two numbers that you really need to keep an eye on, the radar on is cash, whatever circumstances, and profitability at some point. Now, you might be listening to this and thinking, Mahmood, if you've gone off your rocker here, surely we've got money in the bank, that means profit.

Unfortunately, not. In the world that I inhabit, in the world that I love, the world of numbers, the world of finance and accounting here, there is a big difference between profit and the money that's in your bank account there as well. Typically, also, in terms of how we measure, there's that word again, how we measure things, numbers people love

the idea of measuring things here. When we actually measure profit, you could have a bunch of finance people together, which is probably quite a scary thought here, and all of them potentially could come up with different numbers, but let's deal with that complication later on. Let's get right into the heart of today's show.

Now, effectively, at its simplest, profit is the difference between two key numbers. It's the value of what you're selling. You take off the cost of actually making that happen. So, let's dive through. Let's go through a few examples of businesses that we can all relate to. So, if you are a restaurateur, so your business is about providing food to your customers.

You're going to charge them some money for it. That's the value of what you're selling, and there's going to be costs that you've got, that you've had in order to make that happen. So, you've got the cost of the food. You've got the cost of the waiters, the chefs. You've got the cost of the printing, the stationary, the advertising, and you've got the cost of the kitchen and the microwaves, and the fridges, and the ovens.

So, take off a number that represents the cost. Compare it to the figure that is what you sold it for. Bingo. You've got the profit. If you're a freelancer, so you're applying your trade, you're selling on your expertise, but what's between your ears there as well, you're going to be charging somebody money for your time, whether it's per day, per hour, or per project, and it's going to cost you

in order to make that happen. So, you're going to have to travel to see that client. So, there's travel costs there. There's going to be perhaps the cost of advertising or services, any professional damage insurance you've got. Work out the difference between those two numbers and there's your profit for doing that

itself. Now, if you are in the business of making things, so physical products, whatever that physical product is, so it could be anything from calculators to frames to cars, you've got the value of that item that you sell to the customer for, and then there's all the costs that have made it happen. So, all the parts, the engine casings that will go in there, the costs of running the factory.

Figure all those out. There you've got your profit. Sounds simple, doesn't it? And at its basic, it's a pretty simple calculation to make. Now, as we dive deeper, we are going to throw in some, complicated for some, straightforward for others, some language. That language and buzzwords we've talked about in previous episodes is what finance people love to throw into the mix.

And what we're going to try and do is to strip that bare and actually see what it means under the bonnet. Now, coming back to our examples we've had of our restaurateur, coming back to the examples of a freelancer, coming back to the examples of a manufacturer, and it makes so odds what that business actually is.

We're now going to split that profit up into two groups. Now, a little bit of a thing to bear in mind here. It is very possible, and in fact, it's not that unusual that a business can actually make a profit. Bingo. We've got a tick box there. That's what we love. But actually, it could also be in financial problems.

And it's not unheard of for a business that's actually profitable to not survive either. And if you're scratching your heads thinking, what on Earth should that be? Bear with me. Dive a little bit deeper. So remember, profit is your end goal, one of your key objectives amongst many else. So, delighting customers, doing a good job, managing to keep continuing, not going back into a paid job,

making sure that you have the delights to the customers and the job that, and the business that you want. That's brilliant. That's what you need to do, but you've got to have profit coming in to keep those wheels turning ultimately. Now, let's think about what we just said about this idea of profit. So, I said to you, profit, you can divide that up,

you can subdivide that into two groups. There's something called gross, and I don't mean it's horrible - you're not going to sort of have a seizure in front somewhere - but gross profit, and then we come down and we talk about net profit. Some of you may have come across these words already. Some of you may be very comfortable with them.

Some of you may be thinking, well, my finance guys and girls tell me what that profit is. I'm not sure actually what it means. So, hopefully we're going to make a connection and understand what those two numbers actually are. Let's go for one of my favorite industries here. I love all industries and all businesses.

So, let's think about a restauranteur, somebody who's in the business of serving food to their customers. Pick a dish. Think about your favorite dish in the world, and think about as a customer comes to sit down, we are going to charge them some money for that meal. We could charge them, let's say, 10 quid, 10 pounds.

Now, we look at the cost of the ingredients. We look at the items that have got into that meal, and we might work out that it's cost us about three pounds. So, the difference between those two numbers is seven pounds, and that's your gross profit. Fantastic. That sounds pretty good. Gross profit, by the way,

in some other arenas, some people call it gross margin, they're one of the same thing. Now, we think, great. We can sit back. We sell a hundred of those in a week. That's 700 pounds that we've made. Delightful. Unfortunately. Here's the sadder thing. We don't get to keep all that 700 pounds. Out of that pot,

excuse me, phraseology there, out of that 700 pounds collection there, we've got other commitments that we need to take care of. So, we are going to have to take a slice out for the rent of the premises. We're going to have to take a slice out to cover the wages of the chef. We're going to have to take a slice out for any advertising, the printing of menus.

We're going to have to take a slice out for the electricity that's been used up as well. And again, in the idea of making numbers up, we've got a 700 pounds worth of gross profit. Let's take off, for argument’s sake, 300 pounds. That's 400 pounds net profit that we've actually made. Bingo. Fantastic. That's ours.

Or is it? Behind the scenes, there's probably a couple of people who are rubbing their hands with delight thinking we're going to get a slice of that, and that's those wonderful people we all love, and that's the tax-man and, possibly, people we borrowed money from. But let's revisit that another time. So, we've got your gross, we've got your net.

Let's recap. We've got what we've sold something for. Take off the cost that we associate with that. That gives you your gross profit. Think of it like buckets. I'm a big fan of visualisation. In your mind, think about two buckets that you've got. Bucket number one is the gross profit. Every time you sell a meal,

a bit of gross profit goes into that bucket. Once that bucket begins to fill up, out of that, we are going to cover some of the other costs that we've got in the business. Let's run a bit of lingo now, a bit of jargon. Some people, when they come to this idea of net profit, will use a word that says operating profits. Makes no odds, no difference.

It's exactly the same thing. If you're going to be crazier, there are other terms that float about in the finance numbers universe. Some people use this weird phraseology called EBIT. What on Earth does that mean? Well, that stands for earnings before interest and tax. Think of it as net profit because it's the same.

Think of it as operating profit if that floats your boat. It’s exactly the same. Now, what I'd like to do before we wrap up this thing here, let's dive deeper, a little bit more, if you're still with me, and let's think about some of the language that you might see floating around. So, we've talked about the value of what you've sold your things for.

If we want to go real sophisticated and impress our finance friends here, you might use the word like revenue. Revenue is just basically the value of what we sold something for. We could use the word turnover. For me, from a working perspective, it's exactly the same thing. You can look at sales, you can look at income, all those variety of terms that float about, think of that as that's the description of what you've sold the financial value for.

Now, I want to just throw in before we wrap the show up a couple of more things to consider and when we come back next week, we're going to explore some of these things a little bit more, and we're going to dive deeper into this thing called cost, and I'm going to introduce to you some other ways that people look at that, which will be really powerful

and really make sure that numbers are not only your best friend, but they're riding shotgun with you as well. If you've got a business where you are selling something and the customer, your client, wants time to pay you that bill, in an ideal universe, we don't really want to give that customer time. We'd like money, cold, hard, cash paid into our houses.

That's really a great thing to do. Unfortunately, in the world of business, a lot of us won't be able to have that situation arising. You're going to sell things and then you're going to have to wait for that customer to actually pay you. In the world of numbers, we record that value of what we've sold, that sale, that turnover, that income, not when the customer pays their bill, but when we've actually sold the items to them.

That's the time that we record the value of that sale. Likewise, when we've got costs, we've got things like rates that we pay for a landlord. And where else will we pay it? We've got other costs and commitments, so we might be using some agency staff to run our restaurant. We might have wages and salaries, and we pay them typically at the end of the week, the end of the month.

So, there's always going to be a time delay between having that thing that we've got to pay for and when we've actually used it. And therefore, what we've got to do in the world of numbers is decide when that actually is and work out the difference. So, let's round this up here. So, we've talked about gross profit. We'll talk about net profit.

We've talked about big terminology like turnover, income. We've used the word EBIT. Fundamentally, what we want to focus on for today is, that's the two key numbers here and that's typically displayed and shown into a document called your Profit and Loss account. If you like Profit and Loss account, you're going to love P and L.

If you want to say income statement, take your pick here. All it is, it's a statement showing over a period of time, what's the value of what you've sold, what's the cost of doing that, and what's the profit that's left over. If you're sitting there thinking, okay, why do we need to know this? Well, that's going to be on a future podcast here

coming very soon and we are going to explore and dive more deeply into that. Listen, folks, thanks for your earlobes today. Hope you've enjoyed this episode. If you've liked this episode, I'd love it if you could do the old thumbs up or the rotten tomatoes. Give it a review, share it with your friends, and next week we're going to have another episode of I Hate Numbers here.

Have a great week, everybody. Take care. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.