In our lt article, “Develop a Profit Paradigm” we discussed the importance of acknowledging two important facts about your business: 

Soon after this acknowlt, most owners struggle to a useful “profit” meure.  Eventually, most throw up their hands and k:  “Exactly what is profit and how does it relate to MY business!?”  Answering this question will be the focus of today’s article.

What is Profit?  A bic definition of Profit is this: Money generated by selling a product or service that exceeds the cost of providing that product or service.  Simple enough, right?  Unfortunately, it is not.  Meurets used to calculate “profit” can vary greatly.  For example, your accountant will probably say that profit is your company’s “Net Income” on its Profit and Loss Statet – a number he wants you to maximize.  Your professional, on the other hand, will point tod “able Income” a meure of your company’s profit – a “profit” you hired him to minimize. 

In addition to often giving extremely different “profits,” both Net Income and able Income are extremely limiting meures of business performance for two more reons:

To compensate for these limitations, let’s consider a third type of profit: Economic Prof

Economic Profit:

Here’s an example of how Opportunity Cost works: Say you left a job earning $75,000 per year to start your own business – $75,000 is the Opportunity Cost of starting your business.  If your business earned an annual “profit” of $50,000 your business did not earn an Economic Prof  It actually incurred an Economic Loss of $25,000 (the $50,000 it earned minus the $75,000 you gave up).  You lost $25,000 because you started your business – a very real loss if you that $25,000 to pay your bills!

Opportunity Cost also enables owners to compare the effectiveness of their business decisions to those of other .  If your business earns substantially less than similar-sized businesses in the same industry, it’s incurring the opportunity cost of ineffective business decisions.  It may be time to review and redeploy your business re.

Unfortunately, Economic Profit also fails to incorporate ch flow into its analysis.  with accounting and able “profit,” a business can actually earn an Economic Profit while lacking the ch to pay its bills.  This limitation brings us to the meure we use to gauge small business performance: Entrepreneurial Prof 

Entrepreneurial Profit:  Entrepreneurial Profit blends Accounting Profit, Economic Profit and Ch Flow into a single meure gauging a business’s ability to pay its bills, the owner’s bills, and generate growth. 

How is Entrepreneurial Profit Calculated?  Here’s a bic example: You leave a job making $6,250 per month – money you to pay your living s – to start your own business.  Your business h a truck and other debt payts totaling $1,200 per month.  If your business’s monthly accounting profit is $5,000 what is its Entrepreneurial Profit?  Unfortunately, your business didn’t have one.  It actually incurred an Entrepreneurial Loss of $2,450 ($5,000 – ($6,250 + $1,200) because it w not able to pay both its costs and your bills.  This is very important because, if you’re like most small , you ARE your business.  Your Entrepreneurial Profit lays out the cold, hard truth: To remain open and avoid severe financial hardship, your business must generate $2,450 more in monthly ch flow. 

A small business must survive before it can grow.  To survive it must cover its costs and pay its owner enough to make a living.  To grow it must generate excess ch to reinvest – it must generate an Entrepreneurial Prof

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