Why can’t my business pay the bills, even though we keep increasing revenue?
If you have a problem paying the bills in your business, simply increasing revenue will not improve the situation. It may cause further loss, in fact
It is because you are running your business on REVENUE, not on GROSS PROFIT.
What is gross profit?
Gross profit is the amount leftover that is available to pay all of your operating expenses after revenue and COGS.
Revenue – COGS = Gross Profit.
From gross profit, you pay your operating expenses.
Operating expenses are general and administrative costs include paying employees, software/dues & subscriptions, packing supplies, and other non-direct costs.
While it’s great to know your revenue, you need to know how much profit you have left over after you reduce revenue by your cost of the inventory you bought to earn that revenue (Accrual method).
Understanding your gross profit is critical –
If you don’t understand it, you may be keeping products that are costing you money.
If you are keeping products that are costing you money, by increasing sales, you will increase your loss, thereby digging an even deeper financial hole.
This is also why keeping books using the accrual method is crucial. You need to match revenue and expenses in order to calculate an accurate gross profit.
Anna Hill is the founder of Accounting We Will Go, a firm that provides accounting and bookkeeping services along with training for Amazon sellers.