Income doesn’t equal profit
Income doesn’t equal profit
Despite how it seems, an impressive income doesn’t indicate a healthy profit.
October 13, 2022

Over recent years, Amazon has been repeatedly lambasted for the fact that it “makes” hundreds of millions of pounds in the UK, but pays “no tax”. Obviously, the assumption of zero tax is an exaggeration, but it’s one that’s guaranteed to get people’s blood boiling. After all, everyone loves a villain, and there are few brands easier to paint in this light than Amazon.

We’re not here to get into the nitty gritty of what Amazon does (that’s a very specific example), but the ease with which we shout figures like ‘£23.6bn sales’ and ‘£4.8 billion in turnover’ does highlight a glaring issue in the wider understanding of finance. Chiefly, that sales, turnover and income aren’t the same as profit. As the saying goes, ‘turnover is vanity, profit is sanity’. Turnover will always be far higher than profit; perhaps even deceptively so.

It sounds simple, but it’s easy to forget. You may have, for example, £1 million coming in every year, but after you’ve paid for staff, premises, equipment, electricity, supplies…(and so on, and so on), how much of that money do you actually keep as pure profit? It’s perfectly possible to have an income of £1 million, or even £10 million…or £1 billion, and make no profit whatsoever. It’s unlikely (and untrue nowadays), but a company like Amazon could be paying little tax because it’s making very little profit.

So, why do so many of us become distracted by income figures and forget about profit? Particularly professionals, such as dentists, who deal with numbers every day and are therefore more familiar with them than others.

There are many reasons for this, and the first is this sheer familiarity. It’s likely that you come into contact with numbers on a daily basis. As business owners, dentists deal with numbers and cash all the time, and this can breed complacency, creating the illusion that each of us has the authority to understand how finance operates. And yet, this is a problematic way to view it – after all, we can all draw to a greater or lesser extent, but we wouldn’t be able to create a masterpiece of art, or design a new logo for our business.

Another reason is a straightforward overconfidence bias: those who are experts in one field (dentistry) might assume that they’ll be an expert in others (finance). We’ve written before about the Dunning-Kruger effect, and this also comes into play here: the less you know about a certain subject, the more likely you are to overestimate your competence. It’s not a failing, but unavoidable human nature.

It can therefore be hard to recognise that you need an expert to help in this area. This awareness of our own weakness is often the biggest hurdle – after all, none of us likes to feel that we’re not able to tackle something as “simple” as numbers. However, accepting this and deferring to an expert can be the most sensible of all options. Managing your money isn’t taught in schools; indeed, it’s not even taught on an economics degree, so there’s no reason that you should be able to do it yourself.

This disconnect between income and profit can also be a blind spot for associates looking to buy their first practice, and in this context it’s a misunderstanding that can lead to discontent. The associate might see that they’ve generated £1,200 in sales, that the practice is taking £700 and that they themselves are getting only £500. But associates, take note: the practice isn’t keeping that £700. The lion’s share will be spent out on overheads, leaving around 3-5% of actual profit.

Benchmarks for dentistry clearly indicate where the 95-97% of non-profit income goes. An important component of this is salary, which can account for a large chunk of the money. And it’s important that you do pay yourself a salary: “profit” isn’t true profit if you’re working for free. Owning a practice may be the dream for many, but as a practice owner you’ve essentially bought yourself an expensive job, plus 3% of the profits. This may sound a low percentage, and the figure may not be as impressive as your income, but it’s the standard amount for a principal working at capacity.

The problem with the widespread confusion between income and profit is that it can ultimately cause disenfranchisement. If you create an ecosystem in which profit is bolstered by absorbing your salary, or you’re overestimating how much profit you have, you’re living on a knife-edge. We see people without the infrastructure to evolve and test things, and that’s a worrying set-up, as it doesn’t take much for 3% profit to become -3%.

Clearly, it matters that you pay as much attention to generating and preserving this profit as possible. The first small step is ensuring that you’re correctly identifying what’s income (and where it’s going back out again) and what’s profit. Get this straight, and you’re at least beginning from a firm foundation.

Sadly, there’s no easy checklist to generating profit, as it’s all rather more abstract than this. However, because this is abstract, and because it can all be a little mystical, we’re on-hand to help. If you’d like more clarity over your figures, and help to create scalability in your business, get in touch.

The information contained in this article is based on the opinion of Hive Business and does not constitute formal tax advice. Any tax outcomes will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future. You should seek specific advice before embarking on any course of action. Hive Business does not provide regulated Financial Advice, including advice on investment, insurance or lending products or their suitability for you. This article is provided for information only and does not constitute, and should not be interpreted as, investment advice or a recommendation to buy, sell or otherwise transact, or not transact, in any investment including Bitcoin and other crypto. Any use you wish to make of any information contained within this article is, therefore, entirely at your own risk.

By Ross Martin Group Chairman
If you have any questions or comments about this article, please get in touch.
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