By Ayo Bankole

Sales and profits (gross profit and net profit) are not the same thing. I know it sounds basic, but this is a crucial distinction that so many business owners overlook. And that mistake? It could be the difference between your business thriving or barely surviving.

Take Alex, for example. He sells a product for N10,000. Great, right? Now, imagine a customer buying three units. Alex receives N30,000 in sales. But does that mean Alex is pocketing N30,000 as profit? Absolutely not. This is where most business owners trip up—they assume that the gross profit they make are the net profits they keep. But that’s just not how it works.

The Sales-to-Profit Illusion

Many entrepreneurs, especially those just starting, make this classic mistake: they fail to differentiate between their gross profit on their sales and their actual net profit. They deposit all their revenue and/or gross profit into one account, happily thinking it’s all theirs to spend. But here’s the kicker—if you don’t account for your costs, you’re living in a financial illusion.

In Alex’s case, if he’s not separating the product costs, overhead, taxes, and other expenses from that N30,000, he’s likely setting himself up for a rude awakening. And here’s why—net profit is what’s left after you subtract all those costs from your gross profit. If Alex has to pay for inventory, shipping, packaging, marketing, and taxes, that N30,000 might shrink faster than he can say “Where did all my money go?”

The Profit Engineering Formula

This is where profit engineering comes in. It’s about managing your numbers instead of letting them manage you. You have to engineer your profits, not just wait for them to show up. The first thing you need to ask yourself is, “Why isn’t my profit sustainable?”

Ask yourself these key questions:

1. Should I adjust my prices? Maybe you’re undercharging, and that’s eating into your profits.

2. Are my costs too high? Maybe you’re not buying in bulk, or perhaps you’re dealing with too much waste.

3. Is my quality up to par? Are you spending too much on returns and replacements due to poor product quality?

By breaking down your business into these components, you will see where the money is going. And, more importantly, where it’s coming from.

More Sales ≠ More Profit

Let’s get one thing straight—more sales don’t always mean more profit. You could be working harder, selling more, and lose money if your costs are eating up all your revenue. High sales volume is great, but if you’re not tracking how much each sale costs you, you could be selling at a loss without even realizing it.

This is why it’s essential to structure your costs. If you don’t know the exact cost of producing, marketing, and delivering each product, how can you possibly know what your profit margin is?

Case Study: Alex Revisited

Let’s go back to Alex for a second. Let’s say his product costs N5,000 to produce. Out of that N10,000 sale, he only has N5,000 left as gross profit before considering other costs like packaging, marketing, and taxes. By the time he has factored in everything, his actual net profit might be closer to N2,000 or even less.

But what if Alex didn’t know this? What if he thought he was getting N10,000 or N5,000 per sale and started spending money like he was rolling in profits? Pretty soon, his bank account would start running dry, even though sales seemed strong. This is the trap so many business owners fall into.

The Importance of Understanding Your Financials

The solution? Know your numbers inside and out. Track your sales, but more importantly, track your costs and expenses. It’s only by doing this that you’ll have a true understanding of how healthy your business is. This kind of knowledge empowers you to make better decisions.

Should you raise prices? Should you cut costs? Should you stop selling certain products that just don’t make sense financially, even if they’re popular? These are the hard questions that profit engineering helps you answer.

Sometimes, the most profitable move is cutting something out. And I know that sounds counterintuitive—why would you stop selling something? But if it’s costing you more than it’s making you, what’s the point?

Instead of just chasing sales, focus on how those sales translate to profit. By structuring your costs and understanding your financials, you’ll have a clearer picture of what’s working in your business and what’s not. So, here is the bottom line: Don’t confuse gross profit with net profit.

Ayo-Bankole is a Strategy & Transformation professional with over a 15years experience that covers leadership roles as the Head of Strategy Groups in the financial markets, insurance, and oil & gas industries. As a Strategy Consultant, he led many strategy projects across sub Saharan Africa, working for KPMG, PwC, Phillips Consulting, and C2G Consulting. He has advised over 230 companies, governments and development institutions, including Exxon, World Bank, IFC, Bristow etc, and supported over 10,000 SMEs through his non profit, the Caladium SME Bootcamp initiative, organisers of the Caladium Lagos SME Bootcamp and the Caladium SME Fellowship Programme. Ayo is the Founder and CEO of Caladium Consulting, and also the cofounder and CEO of FedaCash. His consulting experience cuts across strategy & execution, change management, process improvement, due diligence, merger & acquisition, etc.