Last week I talked about turnover, this week it’s What are your business profits?

Most people see profit as the difference between money in and money out. When people say money, they mean notes and coins, what's in their bank account.  That sounds nice, and easy to calculate. However, we are talking about the world of numbers and business here!

Welcome to another weekly episode of I Hate Numbers.  My mission is to inform, inspire and educate you to get closer to your numbers.  This is a must do if you want to make  money from your business and are not run it as a hobby.

Profit is not measured in terms of money in and money out.  When you calculate profit it’s a completely different ball game.

What about accounting terms do you need to know?

In this podcast I am going to look at four jargon words.  Don’t worry, I will convert that  jargon to normal speech!

The four key terms I’ll be de-jargoning, all necessary to understand What are your business profits.

• Turnover
• Cost of sales
• Expenses
• Incurred

How you calculate profit in your business

Profit is about measuring your economic activity and converting that into numbers.  For an accurate calculation of profit, we apply the principle of number dating.  This is a key accounting rule known as the ‘matching principle’

In this podcast will talk about the two main profits in your business, gross profit, and net profit.

Listen to find out more.

Conclusion

Above all, you need to know what your business profit is.  This week’s podcast tells you what you need to know, calculations, tips, and advice.

Listen to find out more.

I love to help business owners connect with and understand their numbers, improve their attitude to money, make more profit, save tax and time.

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Turnover, profit, and cash. Turnover, profit, and cash are the financial Holy Trinity in the business world. Last week I talked about turnover. This week it's all about profit.

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. My name is Mahmood, and welcome to another weekly episode of I Hate Numbers. My mission is to inform, inspire, and educate you to get close to your numbers. This is a must-do if you want to make money from your business and not run it as a hobby. For most people, profit is the difference between money in and money out.

And when people say money, they mean notes and coins, what's in their bank account. That sounds straightforward and sensible, nice and easy to calculate. However, we're talking about the world of numbers and business here. It's bubble-bursting time. Profit is not measured in terms of money in and money out. When you calculate profit, it's a completely different ball game.

What accounting terms do you need to know? You need to be exposed to some accounting jargon here, but don't worry, there are only four jargon words to deal with, and I've got my jargon converter by my side. I'll be de-jargoning turnover, cost of sales, expenses, and incurred. Turnover. When your business provides your promise and your customer becomes responsible for paying for that promise, you have turnover.

Your promise, by the way, is the products and services you sell. Turnover is recorded when the sales event occurs, for example, when you deliver your products or carry out your services. Term number two - cost of sales. These are the costs that are easily traceable and identifiable to the products and services you sell.

For example, if you make furniture, then the cost of wood, workers' wages is a cost of sales. If you run a restaurant, then the cost of ingredients and the chef's wages are cost of sales. If you run a marketing agency, then your team of copywriters, media databases is your cost of sales. In my accounting world, the wages of my team are my cost of sales. Expenses, term number three.

Your business will have support, admin, and infrastructure costs, called expenses. For example, your restaurant will have front-of-house staff, cost of printing menus, repairs, advertising, and accounting staff. If you hear terms like overheads, running costs, operating costs, then fear not. These are expenses under another name.

The last term, the last piece of jargon is the word incurred. Costs and expenses are recorded when you have a responsibility, a liability to pay the supplier. So for example, when your supplier carries out the service for you, when those goods are delivered to you, when your staff work, you incur a cost.

When your menus are printed, you incur a cost, even if the money doesn't leave your bank account until well after those goods are delivered and those services are carried out. Having dealt with a few terms, having dealt with the principle, we're now going to dive in to look at how you calculate profit in your business.

Profit is about measuring your economic activity and converting those into numbers. If you trade time for money, sell goods, make products, the same principles apply. Imagine your business has sold five days of your time, five of your products, each selling for 200 pounds a time. That's 1,000 pounds of turnover.

Good news. Your profit, however, is the difference between your turnover and your associated costs. It's not worked out when the money lands in, or loses your bank account, but when the activity takes place. This may sound a little bit weird and strange, but there's a sense behind the weirdness. Listen on, it'll become less weird.

For an accurate calculation of profit, and accurate accounting don't always go hand in hand. Here's what to do. We've got to get involved with numbers dating and apply a key accounting rule known as the matching principle. See what I did there? I'm going to use a few numbers at a fictional restaurant to help explain, illustrate, and illuminate the two main profits in your business,

gross profit and net profit. Unfortunately, you can't generate turnover without incurring costs. Once you figure out your costs, then you can calculate your profit. Our restaurant of choice, let's call it Tummy Rumble, has a mix of customers and ways of earning money. Its customers are diners that come in, businesses that have events carried out, and the restaurant also delivers food as well as doing outside catering.

Our restaurant Tummy Rumble has generated a turnover of a thousand pounds, and unfortunately, it doesn't get to keep all that 1,000 pounds because there are costs it has to meet. Let's assume the cost of the preparation of the food, the chef's wages comes to 400 pounds. The first profit that Tummy Rumble has got is what's called its gross profit,

the profit that is created and generated from its main activity. Those costs of food preparation, the cost of the wages are taken off the 1000 pounds, and that gives Tummy Rumble a 600 pounds gross profit. Now, that's not the end of matters. It doesn't get to keep all that 600 pounds because there are further costs it has to meet.

There are the costs, the front-of-house staff, the cost of printing the menus, the cost of the rent of the restaurant, the cost of paying yourself. The costs have been totted up and they come to 400 pounds. So, Tummy Rumble has now made a net profit of 200 pounds. Now, let me pause there and let's recap.

Tummy Rumble, our restaurant, has made a gross profit from the food it sells, the deliveries that it makes, the in-house diners of 600 pounds. It's made a net profit after taking into account its front-of-house costs, the wages of its waiting staff, the rent of the restaurant, printing of the menus, advertising, and the like of 200 pounds.

Now, those two profit terms that we've introduced, you will come across different terms. The world of numbers is inhabited by people creating different terms for the same thing. If you hear the term gross margin, if you hear the term contribution, they are the same as gross profit. When it comes to net profit, you may come across terms like operating profit, OpEx,

EBIT, PBIT. Those are exactly the same as net profit. Now, moving on from that, let's assume our restaurant Tummy Rumble, the food costs, the ingredients it's been using, it hasn't yet paid the supplier. Now, that doesn't matter for calculating the profit because it's incurred that cost, and therefore, it must take that into account when calculating its profit.

So, the money that it has to pay out to the supplier is absolutely critical, but it's not vital and necessary for calculating the profits. The rent that it pays to its landlord, the cost of printing the menus, again, it may not have yet paid those suppliers, but that's irrelevant when it comes to working out profits.

Now profit is absolutely critical in your business. It's important, but it doesn't guarantee that the business will survive. Profitability is halfway there, but it's not the final be-all and end-all in our financial Holy Trinity. Now, before we leave this podcast, let's recap, and let's throw a bit of numbers more into the mix.

We've talked about four different accounting terms that you need to be comfortable with. We've talked about turnover. We've talked about cost of sales. We've talked about expenses, and we've also talked about this word incurred. We've talked about profit and number dating called matching, where we compare costs against turnover.

We've talked about gross profit and net profit. We've looked at Tummy Rumble, which has made a gross profit of 600, and a net profit of 200. One final thing on profit in this podcast, that 600 pounds is talking about profit in money terms, in currency, whether that be euros, dollars, sterling, whatever your currency of choice is, and net profit,

likewise, we've expressed that in a monetary value. Now, it's quite possible and it's quite common to express that same figure, but input it in percentage terms. So, we may say our gross margin percent is 60% for our restaurant. We've taken the 600 pounds. We've connected it to our turnover of a thousand, and that gives us 60% gross profit margin.

Our net profit, likewise, we take the 200, we connect it to the 1,000, and that gives us a 20% net profit margin. Now, you may be thinking, well, so what? Well, that's for a future podcast episode, but be aware that profits are typically expressed in financial terms, in money, pound notes, sterling, euros, or dollars, or they're expressed in percentage terms, and it's good practice to be comfortable with both.

Okay, folks. Hope you like this podcast. Give it a thumbs up, give me some feedback. If you've enjoyed it, I'd love it if you could give a review. If there are topics that you want me to cover in a future podcast episode, then let me know. Apart from that, folks, have a wonderful week, and you visit the profit in your business.

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.