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Reflection Questions

You speak to a business owner that is taking in almost $2,000 in revenue each month. The owner still says that they’re having trouble keeping the doors open. How can that be possible? Use the terms revenue, expenses, and profit/loss in your answer.

Answer 1

Revenue is the money the business takes in (sales, fees, etc.). Expenses are the costs of running the business (rent, payroll, cost of goods sold, utilities, loan payments, taxes, insurance, marketing, etc.). Profit or loss is simply revenue minus expenses.

So even with almost $2,000 in revenue per month the owner can still be struggling because expenses can be equal to or greater than that revenue. Example:
- Revenue = $2,000
- Rent $1,200 + payroll $700 + utilities $150 + supplies/COGS $300 = Expenses $2,350
- Profit/Loss = $2,000 − $2,350 = −$350 (a monthly loss)

Other reasons this can happen: low gross margins (COGS high), large fixed costs, debt service or taxes, owners withdrawing cash, seasonal sales or slow collections (revenue on paper but not in the bank), or hidden/variable expenses. Even if revenue covers expenses and shows a small profit, the profit might be too small to cover owner pay, reinvestment, or loan payments.

To fix it, either increase revenue (raise prices, sell more, focus on higher-margin items, improve collections) or reduce expenses (cut nonessential costs, renegotiate rent/suppliers, optimize staffing). A simple monthly profit-and-loss statement will show exactly where revenue and expenses stand and whether the business is making a profit or a loss.