Sales are Not Profit
The biggest mistake for start up business owners is assuming your sales are profit. Sales are what comes into the business, whereas profit is what is left over after all necessary bills and payments are covered. It’s important to note that you shouldn’t set a selling price until all other necessary costs are calculated. This way you ensure cash coming in can cover cash going out.
Mark Up is Not Profit
You may assume that if you intend to make a 20% profit, you can simply apply a 20% mark-up to your product/service. For example, a product that costs $100, applying a 20% mark up to make it $120. However, based on the formula to work out profit margin, this would only provide a profit margin of $16.67. Instead losing the business 3.3% of the expected profit. This discrepancy only widens as the required margin gets larger. Instead, sit down and decide what minimum acceptable margin you need to sustain. Then get the necessary help to actually deliver this margin.
Profit is Not Your Salary
Many new business owners assume any surplus profit is what they should take as their salary. However, this amount has better purposes within your business. Your salary should be included in business costs, so the profit can be used to sustain and grow your business. It may be difficult to maintain the break-even point in the beginning days of your business, where you may need to be thrifty during this period. However, in the long term you should aim to allot yourself a salary that is on par with what you would earn as an employee in your industry.
