4/23/2017

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Making Money vs Making A Profit

What is the difference between making money and making a profit?

The dream of making a profit is what motivates most people to start a business. The problem that many entrepreneurs encounter when starting their business is that they don't understand the difference between making money and making a profit. You can start making money right away but not make a recognizable profit.

Making money and making a profit are two totally different things. There is a big difference. You can make a lot of money, but if all the money is spent paying creditors and overhead, there will be no profit. And when there is no profit, you can't pay yourself. And when you can't pay yourself, in most cases, you can't continue to operate your business because you have to have an income to live and survive.

Unless there is money coming from other sources, a business needs to make some type of profits. This is crucial because, unless you set aside the right amount of capital to keep your business afloat until it starts to make a profit, the possibility of failure increases dramatically.

A profit is the difference between the income generated by the business minus the costs and operating expenses that are incurred by the business. The income can come from sales, manufacturing, production, renting, leasing, farming, ranching, or any endeavor in which people pay for goods and services.

With any business venture, the most important question is how long it will take a profit to materialize and whether or not such income is sustainable. The answer depends on the type of business it is, how the income is generated, and most importantly, the costs to run the business.

A true profit is one that does not have to be put back into the business for the business to maintain the potential for growth and stability. It should be noted, however, that the majority of businesses, big and small, have to spend money to make money. This means that some of the profits are voluntarily spent to strengthen the company's visibility and viability, thereby enhancing the possibility of generating even greater profits.

To determine a company's true profit margin, their has to be an accurate accounting of all money the company makes along with operating expenditures.

  • Expenditures include salaries, purchase of supplies and equipment, the rent or lease of office space, the necessary insurances, taxes, and other business related expenses.

When starting a business, it is always a good idea to set money aside in case earnings are less than anticipated, there are unexpected cost overruns, or if there is an economic downturn. Your accounting practices will have a huge impact on whether your company becomes successful and whether it maintains it's ability to stay solvent and productive.

When a company first opens for business, the earnings may come fast, but this does not mean that the company will be profitable. An entrepreneur has to know the difference between making money and making a profit and then he or she must know how to spend wisely and manage resources accordingly.

This is why entrepreneurs must plan, plan, and plan before opening for business. Even the best of plans don't guarantee success, but they do reduce the risks of failure.

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