Loading...
Answers
MenuWhat does Marcus Lemonis means in the article below?
"your expenses as a percentage of your gross profit — "not a percentage of your sales. You pay your bills with gross profit — not with revenue."
Answers
[This is a duplicate of the question at https://clarity.fm/questions/4300]
Since some new business owners get excited about revenue, instead of gross profit, it is always wise to show the difference.
Let us consider as an example, that your business makes $10,000 (revenue) in revenue in one month, and has a cost of goods (or services rendered) of $7,000. This means that you have to pay someone (e.g. a vendor) $7,000 to make $10,000.
Then, you are faced with general expenses for the month that amount to $2,000 (utilities, etc.).
The excerpts that you quoted from the article mean that you should NOT think that you are spending $2,000 from the $10,000 (revenue), but that you are spending $2,000 from the $3,000 (gross profit: $10,000 - $7,000).
As you can imagine, you will be much more cautious when you realize that you are spending 66% of your gross profit on expenses, and not simply 20% of your revenue.
While this is certainly common sense, the reason for his pointing it out is that sometimes people do not keep it in mind.
It seems that he's using the following definitions:
1) [Sales Revenue] - [Cost of the Goods Sold] = [Gross Profit]
2) [Sales Revenue] - [Cost of Goods Sold] - [Expenses] = [Net Profit]
So then do
[Expenses] / [Gross Profit] = ["Your expenses as a percentage of gross profit"]
This % allows you to get a better idea of how much you could increase your [Net Profit] by reducing [Expenses] (e.g. by making advertising, rent, salaries, etc. more efficient)
Gross (Income) is raw money before taxes.
Net (Profit) == Income - Expenses.
I ignore income, as it's fairly meaningless.
Profit, what you have in your hand after you pay your expenses, is real money.
Using the term Gross Profit likely means Pre-Tax Profit.
In other words, after paying your expenses you have Gross Profit. After paying Taxes, you have Net Profit.
I treat Taxes as a hard expense, as you must pay or end up in Club Fed or more likely having your assets attached, like liens on your property.
This writer you mention could likely clarify his terms a bit more.
Related Questions
-
How do we log the inital funding of a C-Corp with funds from the owner's personal account in Quickbooks?
When you open a bank account for your corporation, you'll need to make an initial deposit with your personal funds. A shareholder's initial contribution can be recorded as either debt or equity. If you want to record the initial contribution as equity, you would debit cash for the amount deposited into the bank account, and credit an equity account, such as “shareholder’s equity” or “capital stock”. Alternatively, you can record the deposit as a shareholder loan. Debit cash for the amount deposited, and credit a liability account, such as “Loans from Shareholder”. There are also methods to bifurcate the contribution by recording a contribution as a combination of debt or equity.JK
-
Should I collect NY sales taxes for online marketing and web development services offered to NY clients?
Generally, the transfer of tangible personal property is the trigger for a sales tax event. In this case, it may be necessary to review the various aspects of a typical transaction to determine if any portion thereof would be subject to sales tax. However, generally speaking, receipts from the sale “Marketing”, "Media Placement Services" and "Web Site Networks" are not subject to State or local sales and compensating use taxes provided your organization does not sell or otherwise transfer any tangible personal property to its clients in conjunction with these activities or perform any services otherwise taxable under Section 1105(c) of the Tax Law in conjunction with these activities. (See, Advertising Agencies, Technical Services Bureau Memorandum, June 10, 1983, TSB-M-83(16)S. For additional guidance, you may also want to refer to Publication 750, A Guide to Sales Tax in New York State http://www.tax.ny.gov/pdf/publications/sales/pub750.pdf. I hope that you find this information useful. Shawn Powell Joseph Reference TSB-A-97(43)sSP
-
How should we divide up expense account amounts between partners?
I'm going to answer you with my own experience. The way you mentioned to divide the expenses makes total sense and it's consider the "rational" thing to do. I have seen it work many times and it's what many would consider "fair". The problem (and this is counterintuitive) is that we are humans with emotions and we can't separate us from them. Once someone starts buying nicer things the "ego" hits in, also the "jealousy" and the competitive nature. This brings bad culture and a worst environment. I know you think "we are different", "it won't happen to us" but it actually does and it's not your fault, it's just our nature. My solution is the following. Treat the company as a separate entity from the three of you. So the company (not you) have revenue and costs. THE company can have expenses and they should be as little as possible to run efficient and lean. THE company has to create the most profits as long as it's in the same direction of creating value for their clients. Now, because the company has shareholders (you guys/gals) the profits it generates will go into your pockets 50/30/20. This is after your salaries, that depends on your place in the company and that is money totally entitled to each of you. The profits can be expended as whatever you want because it's like part of your salaries. You will think this makes no sense due that is just a "technical" step. But it's important to separate you from your company. Keep personal and professional in each side of the table. Hope this helped :) If you want to reach out I would be happy to talk. I have helped many family companies to also deal with this kind of issues. Have a great dayJC
-
Share of Market calculation. TAM, SAM and SOM?
SOM refers to the portion of the market that your business COULD actually capture, as you stated: "[the] % [you] can realistically achieve from the SAM." Let's use an analogy to break this down - and pretend you are talking about fishing instead of project management software. TAM refers to all the fish (that manage projects) in the sea. SAM are all the fish (that manage projects) within casting range of the dock you fish from (ie your solution is viable for them). SOM are the number of fish (that manage projects) you can reasonably catch within the amounts of time, energy, and bait you can allocate to fishing. The question within a question you ask about guidelines on believability is a great one. And, while I don't have a guideline or benchmark to share, I can confirm your instinct; ensuring that your projected SOM is reasonable is absolutely critical. The best way to project this is by having at least some of the equation variables grounded in reality - ie, actually catching some fish. If you can show how much it costs to acquire a customer, how much it costs to service that customer, and how much you'll make from that customer over a lifetime, you've got some great empirical evidence to show how you'll achieve growth within your SOM. I don't think of SOM as a target - it is rather the theoretical maximum number of customers or revenue I can achieve within the (sub)universe where my product or service adds value. In the end - the number is important - but not as important as how you present it, and how you'll approach it with your product. As an investor, you want to see more than just the answer - you want the thought process behind the answer. Was the founder thoughtful in their approach, did they look beyond the obvious while remaining pragmatic? Do they understand clearly why the SAM (macro-environment) and SOM (micro-environment) break out of the TAM in the proportions they've listed? More than happy to dive deeper on this.RR
-
Office Manager/Adin or Bookkeeper? We have a position for 40 hours, 10-15 hours of bookkeeping, 10-15 hours of HR, and 10-15 hours of admin
Bookkeeping and Admin roles are completely different, if a person knows debita and credits doesn't mean that he/she is a good bookkeeper, sometimes there are situations where you need expert advise which an experienced bookkeeper can provide because they are experienced and skilled. Sitting on two hourses very rarely makes sense. If you hire somebody to manage both roles you are going to feel stress over a time because in this situation you have to invest more of your time along with that person to manage things in organised way. I would suggest to hire seperate individuals for these roles because of the price variation, time required to manage specific tasks, expertise etcAM
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.