Do you know what “Profit” is?
I ask this seemingly simple question because most entrepreneurs think they know what profit is…but their actions show they really don’t.
Webster’s’ dictionary defines profit as a noun…as a ‘thing.’ Profit is more than a noun or just a thing. It is a state of being which is recognized by performing certain activities in a way which leverages your inputs, to maximize your outputs, in the form of money. More specifically, consider the following:
Profit is CASH. This may sound simple, and it is — but it must be noted so that it is intimately and overtly understood. Profit is ALWAYS in the form of cash. It is not in the form of a Check, it is not an IOU, nor is it an Accounts Receivable. Again, profit is CASH in your possession — NOW. Not later. Profit is NOT Stock, it is not equity ownership in a company. Profit is cash that is spendable right now.
Profit is NOT reinvested in the business. Profit, in the form of cash, NEVER sees the business which generated it again — EVER. Profit is recognized as a dividend, and comes after taxes and retained earnings are distributed. It is therefore mutually exclusive from your business. It is totally separate from your business. Therefore, your Profit is free from any business encumbrances whatsoever. It is your budgeted bonus for the risk you undertook in the enterprise.
Profit is NOT the cash balance in your bank account. A common trap entrepreneurs fall into is where they think their business account balance (cash) represents their PROFIT position, and is measured by their checking account. This is false. This is another reason why profit is extracted from your business and placed in a totally separate account. Again, significant portions of money earned from your business must be reinvested in inventory, overhead, and other ongoing expenses as retained earnings.
By mixing ‘profit’ with retained earnings, you never know where your true profit level resides, if it is increasing, decreasing, if you are making money or if you are about to go into bankruptcy. Profit is NOT the amount in the business account.
Profit resides in a separate bank account. Again, because your profit is totally separate from your business and it is not reinvested, it goes into a separate bank account. A personal bank account, a trust account or any other asset vehicle that you control separate from your company. If your profit is not held in a separate bank account, it may be considered an asset of your company and can be liened upon, frozen, or seized based upon unforeseen business conditions.
As a business owner, understand this…
Your profits belong to YOU.
Your company belongs to YOU.
Your profits don’t belong to your company.
This is an important delineation. Profit is removed from your company’s physical reality in all ways. It is totally separate.
True Profit is removed from the company.
If your “Profit” is still in use by your company…it’s NOT profit. Learn more here.