Revenue, Income, Profit: What You Need To Know For Your Branding Agency
Early on in building my branding agency, I learned a lesson that shaped my whole perspective on how to build a business that gives you what you want in life.
The top-line revenue isn’t going to determine what kind of business and life you have.
So let’s dig into the differences between revenue, profit, and income and why you have to distinguish them in your mind.
What I learned being around $1m+ business owners
Back in 2013, I was dead set on growing my business.
And one of the things I did to invest in myself and in my business skills was to join a programme called EO [Entrepreneur’s Organization].
Now EO is primarily fo $4m+ businesses, and I was nowhere near there.
But they have The Accelerator Program, and you can get into it if your company is doing $250k-$1m.
At that time, I was just squeaking by $250k in revenue, so I joined.
And it was an incredible experience.
I met so many people there that I am still friends with to this day. Some of my best friends came from being in EO, so I have nothing bad to say about it.
I learned a ton, but there was one big thing that I learned in EO, not because they taught it to me, but because I observed it.
It was the difference between revenue and profit and how important it is to distinguish those things in your own mind as a small business.
Because even by joining EO, my focus was on getting to a million. That's what the accelerator programme was all about.
How are we going to help you get to a million so you can join the big dogs in the EO programme?
And what I found out as being a part of the accelerator programme, and getting to rub elbows with the members and getting to network with people who had $1m+ businesses was that some of those $1m+ business owners were actually taking home a lot less money than I was.
And once I started to realise that making a million dollars or $2 million as a business does not mean that you're actually taking home the amount of money that you want or need.
When I realised that it wasn’t even as much as I was taking home as a quarter million dollar business, I got really disillusioned with the whole thing and I ended up leaving.
And it really helped shape my perspective about how to build a business to give you what you want in life, because the top line revenue is not going to ultimately determine what kind of business and life you have.
And so that's what I want to talk about today, the difference between revenue and income and profit.
Revenue, income and profit for branding agencies
So first, let's define these three words.
And let's define them specifically for our one to two person branding agency niche because these numbers can mean different things when you are growing a product business or when you are building a business where you have tons of employees.
And when you're just a small agency and you really are your business, it can be easy to mix up revenue and profit and income.
Revenue is the top line number that is the gross amount of money that you bring in.
Income is everything that you take home. This is going to be how you pay for your life, everything that ends up on your personal tax returns that you pay taxes on, that is going to be considered your income.
Now, when you are a small business, your profit is going to be considered in your income.
Profit is going to also be taxed because if you are an LLC, everything that you make that isn't expensed is going to be considered your taxable income.
But the way that I would define profit is the extra money and time that you have available to you above and beyond what you need to live your life.
Now inside No BS Agency Mastery, I created something called the Freedom Calculator.
It is a tool that I developed for myself and now I share with all small agency owners that I coach to help you figure out what those three numbers need to be.
How much profit do you want to make?
How much income do you need to live your life and and support your business?
And then how much revenue do you need to bring in in order to pay for your life your business and cover your taxes?
And inside that Freedom Calculator, it calculates your profit not just in terms of money, but in terms of hours as well.
Because when you are your business, when you show up to deliver services and that's how you generate revenue, there are two ways that you can profit.
You can profit in making more money above and beyond what you need to live and pay for your lifestyle and your business.
And you can profit in hours, the amount of time above and beyond nights and weekends (I'm already assuming you don't work nights, you don't work weekends).
And in fact, the Freedom Calculator bakes four weeks of vacation into your schedule.
So we are assuming you have at least four weeks off, you don't work nights and you don't work weekends, but your profit in hours is going to be how much time above and beyond that do you also have available to do whatever you want with?
We'll talk about that in a little bit.
Why are these numbers so important to distinguish?
Because until you track your income and your profit, and until you design a business that's going to give you the numbers that you want, you are likely going to make business decisions, looking to increase your revenue without increasing and very often decreasing your profit, both in hours and in money. And likely in both.
How focusing ONLY on revenue wiped out my profit
Let me give you an example.
At the end of 2012, I had been in business for a little over a year and a half. And I felt like I had made a lot of money because I had $20,000 in the bank in December of 2012.
And that was more money than I had ever had at once in my life.
I felt like I had so much money, I knew I wanted to grow and I was determined to invest in myself.
And I felt like “Okay, how am I going to get to the next phase of this business? I need to invest in myself.”
And that's when I got a studio, and I started hiring.
Why did I buy those two things?
Why did I invest in employees and an office?
Because I was focused on revenue.
I was thinking to myself, “How do I make more money? How do I generate more sales?”
Well, at the time, I was totally maxed out with work. So the only way that I would be able to take on more clients would be if I had more help.
I was also thinking I want to raise my prices.
And I felt like the only way I'd be able to raise my prices is if people took me seriously. And I thought “You know what, I need an office and I need a team if I'm going to compete with these other agencies who have offices and teams, and they're the ones who are charging those higher prices.”
And over the next year, it kind of worked. Our revenue actually doubled.
We went from something around $120,000 in that year to about $240,000, probably a little closer to $250k.
And right after that I joined EO so I had just eked out a quarter of a million dollars.
But looking back, it turns out that our profitability in dollars and in hours went down.
We were still working all the time.
Despite doubling our revenue, Steve and I were still working seven days a week.
And we ended up at the end of that year and a half in $40,000 of debt.
How did that happen?
I was focused on increasing prices, and just bring in more and more cash because now I had a lot of overhead.
So I had to cover everything over that year and a half. I raised our prices from about $6,000 to $10,000 for an average project to about $20,000 to $30,000, for an average project.
I mean I 3x-5x’ed my prices, and we still ended up in debt.
In fact, about a year and a half after that in March 2014, I was backed into a financial corner, and I was forced to let my employees go.
Because I had debt, I had no cash and I had no more credit available to me.
That's when I looked at the numbers for the very first time and really saw it.
That's when I realised that the $30,000 projects that I had been pitching in proposals was actually less profitable than the $3,000 projects that I was doing on the side for people who couldn't afford us.
Stop focusing on revenue, and build profitability
Let me break this down for you really quickly.
A $3,000 project for us was taking me and Steve one day to complete.
The $30,000 projects that I was pitching were taking me and Steve and two full time employees six to eight months to complete.
Now, obviously we're working on multiple projects over that six to eight months.
But if you were to take all the time that we spent, and condense it, including all the emails, the meetings, the creative work, the revisions, the punch lists, the quality assurance and quality control lists, those big projects stacked up to way more than 10 full days of work.
Why am I saying 10?
Because in order for the $3,000 one-day project and the $30,000 8 month project to be equally profitable, it would have to take us only 10 days to complete, from start to finish, everything included the $30,000 project.
In this case, it was taking two to three times as long, making it much less profitable.
In other words I would be way better off just doing 10 x $3,000 projects. If I did 10 $3,000 projects, I would spend 10 days delivering, and I would make $30,000.
And I would have all that additional time available to work with more clients, or do other things like invest in my business.
And on top of that, those $30,000 projects were way harder to find and they took a lot longer to close.
I had to make big, beautiful pitch decks and I had to have multiple meetings, adding to the unprofitability of those projects.
The $3,000 projects took almost no time to close - there was no proposal, there was no pitch deck, it was just “Here's what it is - yes or no?”.
Now since then, over time, I grew that $3,000 One Day Intensive back up to a $30,000 One Day Intensive, but I did so keeping it profitable.
By the time I got that price back up to $30k, that whole project was still only taking me and Steve about four to five days to complete.
So two people in four to five days, instead of four people in 20 to 30 days.
I mean, it's not even comparable, how much more profitable the Intensives were.
And because they were so much more profitable and have continued to stay profitable, it means I got all of that time back, I could use that time to work with more clients or work on my business.
When I use it to work on my business, I build my authority, I build my skills, and I increase the demand for my services.
And I also use it to invest in my personal experience of life - vacations, trips, investing in personal projects, and starting a family.
Only when I got our projects to that level of profitability did Steve and I even consider and pretty quickly decide that we had the time, money and space to have a child.
Because honestly, living in New York City where everything is so expensive, I really couldn't even imagine having a kid before we reached that level of profitability, it would have been so stressful to feel like I always had to be working with clients just to make enough to support our lives.
And I would never feel like I had enough time to be there for my child.
That's truly what profitability gave me.
I imagine that you have some version of what you want in your life that would require more time and more money to achieve.
It's not revenue that's going to get you there.
It is the profitability of your work, your ability to make more and more in less and less time.
There's actually a formula that I developed for this called the 50-25-25 formula for profit and freedom.
And I just revamped it into the Price to Freedom Calculator that shows you exactly what you need to charge to achieve your freedom lifestyle.
You can plug your numbers in and under 60 seconds it'll spit out the price you need to charge.
To get this go to nobsagencies.com/price to grab the Price to Freedom Calculator.
In the next post, I'll talk to you more about the Calculator and the 50-25-25 rule to profit and freedom, and why everyone needs to know their Price to Freedom if you want to achieve the business and lifestyle that you're looking for.
Here’s what you need to get…
If you only ever focus on your top-line revenue in your business, you’ll never achieve the business or the freedom you want in your agency.
When it comes down to it, the most important figure to look at is your profit - in money and in hours. Once you have that figured out, you’ve got the foundation to build a No BS agency that lasts.
P.S. You can always jump on a call with my team if you want to fast-track your profitability, and learn all my other tools and strategies to scale up your agency - just go here to get started!