Net Profit - Why It Is Important Part 1

Recently I was at a networking dinner for my mastermind group. One of the other investors said that they made $30,000 profit on their last flip deal. With the high fives flying I asked, not to be a party pooper, "Is that gross profit or net profit?" The investor asked me what the difference is? Until recently I would have responded the same way. Until I a went to "Net Profit Anonymous." 

On my fix and flips, the gross profit is the amount I sell the house for (revenue) - all the direct costs that I can tie directly to that property (COGS - cost of goods sold). What is left over is my gross profit. If my deals are 100% financed, the gross profit is what goes into my bank account from the title company. The net profit is what's left at the end of the month after all of my worker's wages, advertising expenses, other overhead, and most important and maybe most controversial in this article, a market salary for my efforts in the business. Some of my friends don't pay themselves a salary and take it out of the "profits" at the end of the month. While this is fine, legal, it can make the company appear more profitable than it is. 

When I started investing my first goal was to get a house under contract, my second goal was to wholesale my first deal, fix and flip my first house; you know the progression. My net profit problem started when I started equating success with the "number of deals" I did instead of the monthly, quarterly, and yearly net profit. Someone once told me, "We run a business for three purposes. 1. To make an excellent compensation for our daily efforts in the business. 2. Tax advantages of running a business. 3. Net profit. If there is not anything left over at the end of the year, we are better off getting a great job instead of taking on so much risk that is associated with running a business. The net profit is what compensates the business owner for the large risks they take."

How I became more profitable in my business was to start doing more profitable deals. Sounds crazy I know. Can you believe I paid I coach to teach me that? I am so glad I did. When I started out, it was easy to talk myself into making $15K or $20K on a $180K fix and flip because it was much more money at once than I ever made in my regular job and some money was better than no money. What I realized was if I kept doing lean deals, it would be hard to do enough of them to hit the net profit goals I set for myself. Stay tuned for part two where I will share what the minimum amount of profit should be and why.