{"id":171687,"date":"2014-04-10T04:00:54","date_gmt":"2014-04-10T11:00:54","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=171687"},"modified":"2023-10-04T21:38:35","modified_gmt":"2023-10-05T03:38:35","slug":"the-power-of-profit-margin","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/the-power-of-profit-margin\/","title":{"rendered":"The power of profit margin"},"content":{"rendered":"

\"BeAfter six months of work, my guide about becoming the Chief Financial Officer of your own life is ready for launch! Be Your Own CFO<\/strong><\/em> will be released on April 22. Over the next couple of weeks at Get Rich Slowly, I’ll share some background on this project, including excerpts and outtakes. Today, for instance, I’ll give you a taste of what I’ve written about the importance of profit.<\/p>\n

The overall theme of my new guide is that people would have greater success managing their money if they acted as if it belonged to a business. I think most of us understand that companies can’t exist without profit. But for some reason, people don’t practice this concept in their personal lives — even though the same principle applies!<\/p>\n

<\/span>The Importance of Profit<\/span><\/h2>\n

Profit is the life-blood of every business. It’s like food and water for the human body. Although proper nutrition isn’t the purpose<\/em> of life, we can’t exist without it. Food and water give us the strength we need to pursue the things that bring us happiness and meaning. Similarly, profit isn’t the purpose<\/em> of business, but a company can’t survive without it.<\/p>\n

What’s the purpose of business if it’s not profit?<\/em> It varies from company to company. Harley-Davidson says it exists “to fulfill dreams of personal freedom.” Nike wants to “bring innovation and inspiration to every athlete in the world.” Perhaps the most notable example of a company that doesn’t put profit first is Apple, which has taken a lot of flak on Wall Street recently because it “has to” release a new product or risk becoming irrelevant. Apple lets the pundits squawk and quietly pursues its purpose. Meanwhile, they continue to make money.<\/div>\n

Companies that forget (or ignore) the importance of profit often become unable to meet their goals. Instead of pleasing customers or developing new products, they find themselves in a struggle to survive. A good Chief Financial Officer aims to maintain and maximize profitability.<\/p>\n

Individuals need profit too. If you’re living paycheck to paycheck — or worse, sinking into debt — you’ll find it impossible to accomplish the goals you’ve set for yourself. Plus, today’s profit acts as a safeguard to protect you against an uncertain tomorrow. It also provides flexibility, giving you more options and allowing you to seize more opportunities<\/a>. What’s more, you can invest a profit, growing the money for future needs, such as retirement.<\/p>\n

The bottom line: To fulfill your dreams, you must earn a profit.<\/strong><\/p>\n

<\/span>Calculating Profit<\/span><\/h2>\n

Profit is simple to calculate. It’s your net income, the difference between your revenue and expenses. If you earned $4,000 last month and spent $3,000, you had a profit of $1,000. But if you earned $4,000 and spent $5,000, you had a loss of $1,000.<\/p>\n

This idea is expressed by a simple formula:<\/p>\n

PROFIT = INCOME – EXPENSES<\/strong><\/div>\n

Since the beginning of this blog, I’ve called this the fundamental equation of personal finance. If you spend more than you earn, you’re operating at a loss; you’re losing wealth and in danger of going into debt (or, if you’re already in debt, you’re digging the hole deeper). If you spend less than you earn<\/a>, you’re producing a profit and building wealth, which can be used to pursue your goals.<\/p>\n

Your net worth is the accumulation of years of profits and losses. The greater the gap between earning and spending, the faster your net worth grows (or shrinks). This may seem obvious, but it’s important. Everything you do — clipping coupons<\/a>, saving for retirement, asking for a raise<\/a> — is done in support of this basic idea.<\/p>\n

Because this equation is so simple, there are only two ways you can boost profitability:<\/p>\n