Design Your Future Pt 2: P.R.I.W.
“Profit Reflects Income’s Worth”
With the excitement of growing your clientele, completing stunning projects and watching the numbers in your bank account soar, it can feel like you are on the fast track to financial success. However, there's often a misconception that can hinder your long-term success.
Understanding the differences between profit, revenue, income, and wealth is crucial to achieving financial success and ensuring a secure future. Let’s delve into these concepts through the lens of P.R.I.W. - Profit Reflects Income's Worth, and debunk the myth that income or profit is synonymous with wealth.
P.R.I.W.: The Framework for Financial Clarity
Profit Reflects Income's Worth (P.R.I.W.) is a powerful acronym that can help you to distinguish between key financial terms and make informed decisions for your interior design business. Let's break it down:
Profit: The financial gain your business makes after deducting all expenses from your revenue. Profit truly reflects the worth of the income generated because it accounts for the costs of running your business. It's critical to track your profit regularly to ensure your business is sustainable and growing.
Revenue: The total amount of money your business earns from its services (ie- design fees or time billing) and product sales (ie- sales of furniture, fixtures & equipment), before any expenses are deducted. High revenue is great, but it doesn’t always translate to your business being profitable.
Income: This is where things tend to get convoluted. In the context of your business, income can refer either to revenue or net income, which is essentially another term for profit. However, we need to separate and distinguish business income from personal income. Business income is the profit your business generates, whereas personal income is what you pay yourself as a worker within the business (ie - you are an employee of your business). From here on out, when we say income we are referring to personal income.
Wealth: Wealth is the accumulation of valuable resources and assets over time. Unlike profit or income, wealth reflects your long-term financial stability and ability to retire comfortably. Building wealth involves strategic planning and wise investments beyond just earning a high income.
Distinguishing Revenue Income & Profit
As a business owner, it’s necessary to differentiate between the revenue your business generates, the income you pay yourself and the profit the business has remaining. The revenue the business generates is meant to cover all business-related expenses. Your personal income, or salary, is one of those expenses. Profit is what remains after all operational costs, taxes, incomes, salaries, and other expenses have been deducted (subtracted) from your revenue. It’s the net gain that reflects the actual financial benefit to your business.
Each of these are distinguished by the purpose they serve - how the funds are used. Among other things, revenue should supply you with an income and profit, two separate and distinct things. Understanding this distinction is crucial because it affects how you manage your business finances.
Why Profit Should Not Be Used to Pay Yourself
It's tempting to view profit as an additional , especially when your business is doing well. However, consider the drawbacks of using profit as income.
1. Hinderance to future growth potential: Profits are a vital source of capital for reinvesting in your business. Whether it's upgrading your design software, investing in marketing, hiring new staff, delegating operational functions ( aka hiring Propos’Ability) or expanding your service offerings, profits provide the necessary funds to fuel growth. By paying yourself from profits, you reduce the amount available for these crucial investments.
2. Financial Instability: Your business needs a financial cushion to weather slow periods or unexpected expenses. Profits contribute to building this buffer, ensuring that your business can operate smoothly even during lean times. Dipping into profits for personal pay can jeopardize this safety net, leaving your business vulnerable.
To avoid the pitfalls of depleting your business's resources, it's essential to set your pricing with intention and foresight. Your pricing strategy should not only cover your operational costs but also factor in your personal financial needs and the desired profit margin for business growth. More on this in a future article.
Debunking the Myth: Income or Profit Equals Wealth
Many business owners fall into the trap of believing that a high income or profit equates to wealth. This misconception can lead to the mismanagement of financial resources which can jeopardize your long-term security.
Profit should be used to enhance your services, invest in marketing, and improve operational efficiency. This reinvestment can lead to continued, sustainable growth and higher long-term profits.
Income or wages are used to invest in your future and pay your bills.
Wealth is built over time through the accumulation of assets, investments, and savings. It provides financial security and independence, allowing you to retire comfortably and on your terms.
Conclusion
Understanding the nuances of P.R.I.W. - Profit Reflects Income's Worth - can empower you to make fiscally sound financial decisions for your interior design business. By distinguishing between profit, revenue, income, and wealth, and by debunking the myth that income or profit equals wealth, you can pave the way for financial stability and a secure future.