Income, expenses and profit

Strip any business down to its skeleton and three numbers remain. Income: the money it earns. Expenses: the money it costs to earn it. Profit: what is left. Profit equals income minus expenses, and that one line of arithmetic is the most important sentence in this whole topic.

Income is what you earn, not what you bank

Income, also called revenue, is the value of what a business earned in a period. Here is the subtle bit: earning and receiving are not the same event. If you mow a lawn in March and get paid in April, you earned the income in March. Proper accounting records income when it is earned, and tracks money still owed to you separately. A business can be profitable on paper and still short of cash because customers have not paid yet, which is why accountants watch both.

There is a reason accounting bothers with this distinction rather than just counting cash as it moves. It is called matching: you line up the income you earned in a period against the expenses you ran up earning it, so the profit you calculate actually belongs to that period. Count only cash and a single late paying customer, or one big bill that happens to land early, can make a good month look terrible or a bad one look fine. Matching is what makes one month's profit honestly comparable to the next.

Expenses are the cost of earning

Expenses are what it costs to run the business for the period: supplies used, rent, wages, advertising, fees. Not every dollar that leaves is an expense, though. Buying a $1,200 espresso machine is swapping cash for equipment that will earn for years. Accountants spread that cost over its useful life rather than dumping it all into one month. The next lesson deals with these longer lasting purchases properly.

Revenue is vanity, profit is sanity

A food truck turning over $4,000 a week sounds like a winner. If ingredients, fuel, the site fee and wages come to $3,850, it is earning $150 a week, less than a Saturday job. Meanwhile a tutoring hustle turning over $300 a week with $20 of expenses earns $280. Big income numbers impress people at parties. Profit is the number that pays for anything. When you hear that a business made a million dollars, the first question is always: was that income, or profit?

A month on a few lines

Here is a whole month laid out, with illustrative numbers. A weekend car detailing hustle earns $600 across the month, and that is the income. Against it: $90 of soap, wax and cloths used up, $30 boosting a post, and $25 of fuel driving between jobs, which comes to $145 of expenses. Income of $600 minus expenses of $145 leaves $455 of profit. Notice what is not on the list. The $200 pressure washer bought that month does not appear, because it is not used up, it is a tool that will keep earning, and the next lesson explains where it goes instead. Notice too that if one $150 job was done but not yet paid for, that $150 still counts in the income, because it was earned.