Sales, Expenses, Profits, Oh My!

Here’s a quick lesson for you. It’s surprising how few people really understand what you’re about to learn… the difference between sales, expenses, and profits.

What are sales?

Well, sales can also be called gross revenue, gross sales, gross receipts, or total sales. Whatever you want to call it, sales are the total value of all products and services a company generates in a month, quarter, or year.

Let’s look at your local car dealership. Maybe in a given quarter they sell a bunch of cars. They sell 100 cars, each worth $40,000, and the total amount of money they collect is $4 million. Wow! $4 million! They buy a cake and they celebrate. They give each other high fives. That’s total sales.

But then some guy in accounting raises his hand and says, “I hate to ruin the party, but we had to pay for those cars we just sold.” Turns out, they bought those cars for $3.5 million. That’s an expense. They also had to pay their employees. And the electric bill. And rent on the lot. And don’t forget about the cake they just bought. These are all expenses. The accounting guy does some calculations and says, “Our total expenses for everything add up to $3.8 million.”

And then they start celebrating again because their profit, which is their total sales minus their expenses, turns out to be $200,000.

That’s sales, expenses, and profit.

My clients get pitched on a lot of private companies and investments. The first thing I do when I review these pitches is look at the numbers usually hidden in the back of the packet. The pitch in big bold letters often focuses on the total sales. “Look at us! We sold $2 million last year!” Okay, and what were your expenses? $3 million? Oh! That hurts.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.