If you’re in business for yourself, whether you’re planning your grand opening or a 25 year veteran, I wanted to take a few moments to discuss your expectations.  Science has shown that our expectations can have a significant effect on the outcome of an experiment, which is why scientists prefer double blind testing.  That’s every bit as true for the entrepreneur as well.

Many people are just looking for an income, and the concept of business seems so simple – buy low, sell high.  The purpose of a business is to generate a profit, and most people, especially business owners, think they understand that.  But there are a few assumptions, or traps, that get in the way of far too many business owners.  They really seem like common sense, which makes it so easy to fall prey to them.  Don’t let them destroy your profits.

1) I’m the owner, I don’t need a salary.

This cuts right to the core of what it really means to own a profitable business.  The successful business owner deserves to get paid for investing in the business, taking the business risks and being the creative force behind the business, whether she or he actually works in the business or not.  In addition, all employees of a business deserve to get paid a fair wage for the work they produce.  You would not expect an employee to continue working for your business if you stopped paying them, would you?  If you’re a business owner and you work for your business, you should get paid just like all of your other employees.  Conversely, if you do get paid a fair salary, and there are no profits at the end of the year, you don’t own a profitable business.   You might own a good job, but that’s not the same thing as a profitable business.  It is far easier to sell a business than a job when the time comes, and often selling “the job you own” is downright impossible.

2) Gross Profit is still profit.

I prefer the term “Gross Margin” over “Gross Profit” because I’ve seen too many business owners confuse gross profits and net profits.  “Gross Margin” is your revenue minus your direct expenses.  “Net Profit”, or simply “Profit”, is your revenue minus all of your expenses.  If you’ve paid your direct expenses, but you have not paid your overhead, it’s not profit!  I understand that it’s a whole lot easier to tell a business analyst that you’re making a 30% profit instead of showing a 2% loss, but you’re not fooling anyone but yourself.  If you haven’t factored in ALL of your expenses, it might be gross profit, but it is not profit.  You cannot fix a problem until you acknowledge there is a problem.

3) Cash Flow just means Profit, right?

Wrong.  Profit means your total expenses were less than your total income, but remember that profit is not always in cash.  Profit is sometimes visible as an increase in your bank account balance, but it can also be seen in other areas, such as an increase in your accounts receivable, an increase in your long term assets, or a decrease in your debts.  Cash Flow is all about when the money comes in, and when it goes out.  They are two separate things.  A profitable business that does not have the cash it needs to pay its bills can go just as bankrupt as a company with steady losses.  That’s why it is so important to manage both your profits and your cash flows.

Click to go to part 2 of this post