How to create profits and cash flow, not just Income.
What are profits and how do I create them? So profits are what you end up with after you subtract your total expenses. In other words, “the bottom line”.
The only reason I’m in business is to create profits. For instance, all my investments are to create cash in the form of profits. So people fall asleep when I talk about profits. In addition, they wake up when I talk about income. Above all, I get huge feedback on passive income. So why do people think income is profit?
Income is not profit
The income I produce is not profit. Income is the money I receive when I sell something. Therefore income is really sales or revenue. So when people say they have 1 million dollars income, that doesn’t mean they keep that money. However, it sounds good.
It only matters what I keep after the income lands in my bank account. Therefore If I have 1 million dollars in income, that could mean I get to keep $100. So this is called NET INCOME. So-net income is actually NET PROFIT.
Back in 1999, Jeff Bezos Amazon had a $15,000,000 Income. His net profit was MINUS $5,000,000. In other words, he was losing $5,000,000 a year. So how did he stay in business? Because an investor took a chance and gave him $7,000,000 in cash to keep going. Therefore no investor, no Amazon.
Now I know you’re thinking you can do that too. Bezos and Amazon were in the right place at the right time. Therefore he was able to grow even without creating profits. In other words, he survived because of the internet bubble which burst in 2000. Trillions were lost when all the dot coms went bust. Amazon was selling then for $6.47.
Today Amazon sells for $3200. Therefore Amazon and Bezos would be the ultimate exception, not the rule. I can’t think of any company that had lost for so many years but still survived.
What’s the point
The exceptions are companies that have the potential of making money. For example, Uber loses money but has income in the billions of dollars. 14,1 billion income with a net loss of 8.5 billion in 2019. Their 2020 income is projected to lose 1 billion on 14 billion income. Therefore they have income but no profits. So how long can this last? I’ll let you know in my future blog posts. My guess is not much longer.
Profits, not income.
In the real world, profits are what counts. In the dream world, income or sales are what counts. So if I have income without profits I go bankrupt. But not in the high finance publicly-traded stock world. So how do companies like Uber stay in business without profits? There are people that believe that someday it will be profitable, like Amazon. However Uber is no Amazon.
How I make a profit.
My accounting lesson is easy and simple to understand.
Sales – the cost of sales = Gross Profit – expenses = net profit
Firstly, sales are what I sell my product for.
Secondly, the cost of goods is what I paid for the product.
Thirdly, Gross Profit is sales minus my cost.
Fourthly, Expenses are what it costs me to run my business.
Finally, Net profit is what I get to keep.
Of course, we have to pay taxes so subtract another 25% from your net profit. So my net profit is really pre-tax profit.
How to get net profits.
My net or pre-tax profits come from the buying and selling of undervalued assets. These assets come in many different categories. Real Estate, computers, private and public companies, and sorted other asset classes. Therefore the key to making profits is what I pay for the asset. So if I do my job, profit is realized when I buy it. The sale confirms my right purchase.
If I buy right, then my sale will give me a net profit. If I buy wrong then my sale will give me nothing, and hopefully not a loss. Either way, I never know until I sell my asset if I was right or wrong.
I must know the market value of my asset before I buy it. So buying Ford at $4.00, now $7.00, and General Motors at $19, now $40 were the right decisions. However, since I still own both companies I won’t know the outcome until I sell. Only then do I know my net profit.
My little company.
Today my asset recovery business bought 500 Microsoft Surface Surface Pro 4 pens. My cost is $17 per unit, and the market value is $42. If I’m right in my assessment I stand to make $20 per unit or $10,000 income. So my income is not my profit. My gross profit at $20 per unit is $10,000, but my net profit will be less after expenses.
This little company of mine sells anywhere from $50,000 to $100,000 a month using the above example. Therefore my net profit on this transaction will give me about $13.00 per unit or 500 X $13 = $6500. More like $7,000 net profit.
My example is how all business should be conducted. Therefore if you have a business like mine you need to do the following to get net profits, not just income.
- Buy well below the market value. I use 50% plus below.
- Be 100% sure of the market value before you buy the asset.
- Sell the asset just below market value for a quick sale and the lowest market price.
- If you make a mistake in your purchase, take the loss today.
- repeat the above and reinvest in more below market assets.
Income only results in net profits when you keep your expenses down. So I work from home and have no outside office, car, commute time, debt, or general expenses that most businesses have. Therefore I keep more of my income as opposed to having my expenses eat my net profit.
Earning an income is part of the game, but making net profits and keeping a large portion of your income is what really counts. So be wary of people that talk income and not net profit.