Introduction: Revenue ≠ Profitability ≠ Cash
Many entrepreneurs confuse these three.
$1 million revenue looks great.
But if profit is $50,000 and cash is negative, business is in trouble.
Understanding profitability prevents collapse.
Part 1: Unit Economics – The Foundation
What Are Unit Economics?
How much profit you make per unit sold.
Unit: One service, one product, one customer hour, etc.
Real Example: Service Business
Service: 1 hour consulting
Revenue per hour: $150 Cost per hour: (labor, overhead allocated): $60 Profit per hour: $90 Profit margin: 60%
If billing 40 hours/week:
- Weekly revenue: $6,000
- Weekly profit: $3,600
If double to 80 hours/week (hiring employee at $45/hour):
- Revenue: $12,000
- Labor cost: $3,600 (80 hours × $45)
- Other costs: $2,000
- Profit: $6,400
You doubled revenue but only increased profit by 78% (from $3,600 to $6,400).
Why? Because you added an employee who takes 30% of the revenue.
Unit Economics Reveal:
- Profitability per customer
- Scalability of business model
- Where to focus growth efforts
Part 2: Analyzing Your Numbers
Gross Profit Analysis
Gross Profit = Revenue – Cost of Goods Sold
Example: $500,000 revenue – $150,000 COGS = $350,000 gross profit = 70% margin
This tells you: For every $1 of revenue, you keep 70 cents after direct costs.
High gross margin (60%+): Pricing power, good positioning
Low gross margin (10-20%): Commoditized, fierce competition
Operating Expense Analysis
Operating Expenses = All expenses except COGS and taxes
Should be 20-50% of revenue depending on business type:
- Service business: 30-50% (highest, includes payroll)
- Software/SaaS: 40-60% (high marketing, customer acquisition)
- Retail: 25-40% (lower than service)
- Manufacturing: 15-30% (lowest)
If operating expenses are 70%+ of revenue, business is unscalable.
Cash Conversion Cycle
How long from spending cash until receiving cash?
Days = (Inventory Days + Receivables Days) – Payable Days
Example:
- Inventory sits 30 days
- Customers pay in 45 days
- You pay suppliers in 15 days
- Cycle = (30 + 45) – 15 = 60 days
You must finance 60 days of operations. Need $60,000 cash for $1,000,000 revenue.
Shorten this cycle by:
- Reducing inventory (make to order instead of stocking)
- Faster customer collection (deposit upfront)
- Extending supplier payment terms
Part 3: Breakeven Analysis
What Is Breakeven?
Revenue level where you make zero profit, zero loss.
Below breakeven: You lose money Above breakeven: You make profit
Calculation:
Breakeven = Fixed Costs ÷ Contribution Margin %
Real Example:
Restaurant monthly fixed costs:
- Rent: $5,000
- Salaries (fixed): $8,000
- Insurance: $1,000
- Total: $14,000/month
Average check: $25 Food/labor cost per check: $10 Contribution per check: $15 Contribution margin: 60% ($15 ÷ $25)
Breakeven = $14,000 ÷ 60% = $23,333 in monthly revenue
Or: $23,333 ÷ $25 average check = 933 customers/month to breakeven
933 ÷ 30 days = 31 customers/day
If restaurant gets 50 customers/day, profit is:
Revenue: (50 customers × $25): $1,250
- Food/labor: (50 × $10): $500
- Contribution: $750
- Fixed costs: $14,000
- Monthly profit: $750 – $14,000 = -$13,250 (loss)
If restaurant gets 100 customers/day:
Revenue: $2,500
- Variable costs: $1,000
- Contribution: $1,500
- Fixed costs: $14,000
- Monthly profit: (30 days × $1,500) – $14,000 = $31,000
Part 4: Health Scorecard – Monitoring Business Health
Create monthly scorecard tracking:
Financial Metrics:
- Revenue (vs. target)
- Profit margin (%)
- Cash balance
- Days cash on hand
- Customer acquisition cost
- Lifetime customer value
Operational Metrics:
- Customers acquired (new)
- Customer retention rate
- Average transaction value
- Units sold
- Employees (headcount)
Example Monthly Scorecard:
MetricJanuaryFebruaryTargetStatusRevenue$45,000$52,000$50,000✓ ExceededProfit Margin22%24%20%✓ ExceededCash$85,000$93,000$50,000+✓ HealthyNew Customers151812✓ ExceededRetention92%94%90%✓ ExceededAvg Order Value$2,800$3,100$3,000✓ On track
Track monthly. If metrics are red, investigate and fix immediately.
Conclusion: Numbers Tell Your Business Story
Your financial statements, ratios, and metrics tell the true story of your business.
Revenue says nothing. Profit says everything.
Master understanding your numbers. They’re your business dashboard.
Review them monthly. Discuss with accountant quarterly.
Use them to make strategic decisions.
Ignorance of numbers destroys businesses. Knowledge of numbers builds them.