Revenue Looks Good But No Profit at End of Month
You're busy. Money's coming in. But your bank account isn't growing. Where is it all going? Here's how to find the leaks and fix them.
The worst feeling in business: working harder than ever, revenue growing, but your personal bank account staying flat—or shrinking. You're not alone. This is the most common problem I see in Santa Cruz businesses.
The good news: if you're generating revenue, you're doing the hard part. Keeping profit is a systems problem. And systems problems are fixable.
This is the most common complaint from Santa Cruz business owners:
"We're doing $50K per month. I'm working 60 hours a week. But I can't pay myself more than $3K."
"Summer was our biggest season ever. Made $200K in three months. By October, the bank account is back to $5K."
"We grew revenue 30% this year. But I have less money personally than last year."
Revenue feels like success. But revenue isn't profit. And in Santa Cruz, with high rents, expensive labor, and razor-thin margins, the gap between the two can be devastating.
You're not failing. You're just measuring the wrong thing.
Several factors make profitability especially hard here:
Fixed costs are brutal. Rent for commercial space in Santa Cruz is insane. $4K-10K+ per month for decent locations. That's $48K-120K in annual rent that has to be covered before you make a dollar of profit.
Labor costs are climbing. To attract anyone reliable, you're paying $18-25/hour minimum. Add payroll taxes, workers comp, and benefits, and that's $30-40/hour fully loaded. A team of 5 costs $300K-400K annually.
Seasonal revenue but year-round costs. You make money June-September. You spend it October-May. Without careful management, summer profits evaporate in winter burn.
Lifestyle creep. Business is going well, so you upgrade equipment, hire faster, expand inventory. Each decision is small. Cumulatively, they eliminate profit.
Hidden costs everywhere. Processing fees, software subscriptions, insurance, licensing, maintenance. Death by a thousand small expenses you barely notice.
Here's how to figure out where profit is disappearing:
1. Calculate your true gross margin. Revenue minus cost of goods sold (COGS). COGS is everything directly required to deliver your service or product. If you're below 60% gross margin, you have a pricing or COGS problem.
2. Map your fixed costs. Rent, insurance, utilities, salaried employees, software subscriptions—everything you pay regardless of revenue. Divide by monthly revenue. If fixed costs are over 40% of revenue, you have a structural problem.
3. Track variable costs. Everything that scales with revenue: hourly labor, materials, processing fees, commissions. These should be predictable percentages. If they're not, you don't have cost controls.
4. Categorize discretionary spending. Marketing, equipment purchases, renovations, consulting—things you choose to spend on. Look at last 6 months. Was it necessary? Did it generate return? This is where profit often leaks.
5. Calculate owner's draw. What are you actually taking out personally? Include salary, distributions, personal expenses run through business. Be honest. Is it sustainable based on profit, or are you eroding the business?
Here's the framework that works for Santa Cruz businesses:
Target: 60-70% Gross Margin. If you're a service business, aim for 65-70%. Product business, 60-65%. Below 60%, you're probably underpricing or over-delivering. Fix pricing first.
Fixed Costs: Under 35% of revenue. Rent, core staff, baseline operations. If fixed costs are 40%+, you need more revenue, lower rent, or fewer fixed expenses. This is your overhead constraint.
Variable Costs: 15-20% of revenue. Labor, materials, transaction fees—things that scale with sales. These should be relatively predictable. Track them weekly.
Operating Profit: 15-25% of revenue. What's left after COGS, fixed costs, and variable costs. This is your buffer for taxes, growth, and owner income. Below 10%, you're in danger.
Owner's Pay: 30-50% of operating profit. Take a reasonable salary or distribution. Save 30% for taxes. Reinvest 20-40% in growth. This ensures sustainability.
These changes can improve profit within 30-60 days:
Raise prices 10-15%. Most businesses are underpriced. Test a price increase with new customers first. Track close rate. If you don't lose more than 20% of conversions, the increase is profitable. Do the math—10% higher prices usually means 30-50% more profit.
Cut the bottom 20% of SKUs/services. You probably have offerings that generate revenue but destroy profit (high COGS, high labor, low margin). Kill them. Focus on profitable core.
Audit subscriptions and recurring costs. Software, services, memberships you don't use. You'll find $200-500/month of waste easily. That's $2,400-6,000 annual profit.
Renegotiate vendor terms. Longer payment terms improve cash flow. Volume discounts reduce COGS. Better credit card processing rates save thousands. You won't get it unless you ask.
Improve labor productivity. If tasks take longer than they should, you're overpaying for labor. Better processes, training, or tools reduce labor cost per unit of work. That flows straight to profit.
Long-term profitability requires systems, not just cost cuts:
Implement weekly financial reviews. Revenue, gross margin, major expenses. 30 minutes every Monday. Spot problems when they're small, not after they've compounded for months.
Build a profit-first budget. Start with desired profit (15-20% of revenue). Add fixed costs. That leaves X for variable costs. Structure operations to fit the budget, don't budget to fit operations.
Track unit economics. What's the profit per customer, per service, per hour, per square foot? Knowing this lets you optimize for profitability, not just revenue.
Create spending approval thresholds. Under $100, anyone can spend. $100-500 requires manager approval. Over $500 requires owner approval. Prevents death-by-small-expenses.
Schedule annual pricing reviews. Costs increase every year. If prices don't increase, margins shrink. Review pricing every 12 months minimum. Adjust for cost increases at minimum.
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