Many business owners assume their busiest service is the most profitable. Here are a few common misconceptions that many business owners fall into:
Misconception #1: Thinking higher revenues = higher profits
It seems straightforward that higher-paying clients provide higher profits. However, we calculate profit as revenue minus expenses, and this is where things become tricky.
Most businesses can easily track revenue by customer or service, but expenses are often shared across the entire business. This makes it difficult to identify which services are truly profitable.
Take the following example of a business that offers 3 simple services:
| Service | Revenue | Expenses | Profit |
| Service A | $100,000 | $30,000 | $70,000 |
| Service B | $150,000 | $100,000 | $50,000 |
| Service C | $180,000 | $200,000 | -$20,000 |
| Total | $430,000 | $330,000 | $100,000 |
When you break down the revenue and expenses by service, it is very easy to see in our hypothetical scenario that you could immediately add an extra $20,000 to the bottom line by simply eliminating Service C or increasing your prices to eliminate your loss. However, most business owners only see the “Total” line on their financial statements and are unable to determine that anything is wrong.
Think of all the different expenses that your business pays for that are difficult to track, but may be influenced by an unprofitable service:
- Inventory: If you’re running a restaurant, you may have unprofitable menu items. However, it may seem difficult or even impossible to break down your supplier invoices to determine the cost of goods sold (COGS) for each menu item. Luckily, we’ve written a helpful guide for restaurant owners to measure their true inventory costs more accurately.
- Administrative Salaries: You may have a particular client or service in your business that takes a disproportionate amount of your administrative staff’s time. Whether it is dealing with customer complaints or chasing a problem client who doesn’t pay their invoices, these costs can add up to additional overtime and drain valuable resources away from more profitable services.
- Depreciation Costs: For businesses that frequently travel to client locations, such as skilled trades, food trucks and other mobile operations, the cost of travelling to client sites can be significant. Most small businesses use depreciation methods that are prescribed by the Canada Revenue Agency, which are correct for tax purposes, but may significantly understate the actual amount of depreciation that your business is experiencing. This could cause your equipment to break down and need replacement much sooner than you expected, leading to unexpectedly higher expenses in the future.
- Taxes: For sole proprietors, taking on additional revenue may put you in a higher marginal tax bracket. This would mean that the additional client you’ve taken on would actually be slightly less profitable than you’ve expected. While this wouldn’t cause your overall profits to decrease, it may be worth considering if the extra profit is worth the time spent, or if your energy could be directed to more profitable projects.
- Opportunity Costs: You have a limited amount of resources to maximize your profits. An unprofitable service or customer could be taking time and resources away from projects that are truly profitable, which is arguably the most dangerous cost, as it’s one that never shows up on the financial statements. You may be losing money without even realizing it.
Misconception #2: Thinking more activity = higher profits
Some business owners use the amount of time spent working as an indicator that a business is doing well. It seems intuitive at first: if a business is really busy, then they must be making money! However, while being busy is generally a good sign, it is not a reliable metric to determine how profitable a service really is. A business can be fully booked and still struggle financially if the pricing, costs, or service mix are not optimized.
For example, a service-based business might be operating at full capacity with a high volume of clients, but if each job is low-margin or requires significant time and resources, the owner may actually be earning less than expected. In contrast, a less “busy” business that focuses on higher-value services or more efficient delivery can generate significantly higher profit with fewer hours worked.
This is why focusing on activity alone can be misleading. What really matters is not how much work is being done, but how much profit is being generated per unit of time, labour, and cost.
A more useful approach is to track metrics such as:
- Profit per service
- Profit per hour worked
- Profit margin per client
When these are understood, business owners can start to see which activities are actually driving financial performance, and which ones are simply keeping them busy without meaningfully improving the bottom line.
Misconception #3: Thinking cash in the bank = profit
Many owners assume that if the bank balance is growing, the business is profitable. In reality, cash flow and profit are not the same thing. Cash can increase due to loans, delayed payments to suppliers, or prepayments from customers, even if the business is not actually generating profit on paper.
Did you know: The cash in your bank account may actually increase even if your business is unprofitable. This is usually due to HST, Income Taxes and other amounts you’ve been collecting throughout the year on behalf of third parties. If this is the case, you may be spending cash you don’t actually have. A good bookkeeper can provide insight into your financials, letting you know how much of your cash is actually available for spending.
A business can look “healthy” in cash terms while still operating at a loss once expenses, liabilities, and accruals are properly accounted for.
Solutions
So now that you are familiar with the common misconceptions that business owners have when looking at their profitability, here are some ways you can accurately determine which services are actually profitable:
Tip #1: Track revenue and expenses by customer, product/service, project, class or location.
Most accounting software will allow you to assign your revenue and expenses to different categories to determine profitability. For example, a vending machine business may keep track of each of its locations separately in its accounting system, allowing it to generate financial statements for each location.
This would show if a particular location is generating lower or even negative profits, if the prices are too low, or the service costs are too high.
Every business is different, so there isn’t a one-size-fits-all method that will work for everyone. For example, restaurants often struggle to track their food costs accurately because they buy ingredients in bulk and use smaller amounts per serving. Luckily, we’ve written a helpful guide for restaurant owners to measure their true inventory costs more accurately.
For other businesses, working with a skilled financial professional can help you create financial statements that actually help you make decisions in your business.
Tip #2: Divide your profits by an activity metric
Time is the most valuable resource you have, and this is especially true for busy small business owners. A good way to determine if your time is being spent well is to determine the hourly rate of profit per service.
You can use other activity metrics as well, like:
- Profit per hour worked (most important for service businesses)
This helps you understand how much you are actually earning for each hour of labour. Two services that generate the same revenue can have very different profitability once time is factored in. - Profit per job or per project
Useful when work is discrete and project-based. This helps identify which types of jobs are worth prioritizing and which ones consume disproportionate effort for the return. - Profit per customer
Not all customers are equally profitable. Some require more revisions, support, or time-consuming communication, which reduces their overall value even if they generate similar revenue. - Profit per km driven (for businesses where driving is essential)
This is especially relevant for mobile service businesses, delivery-based operations, or field work. It helps reveal whether travel-heavy jobs are actually worth taking once fuel, time, and vehicle wear are considered. - Profit per visit or appointment
For businesses like clinics, salons, or consultants, this helps compare the efficiency of different service offerings or appointment types. - Profit per unit of output (for product-based or production businesses)
This can help identify whether certain products are worth continuing to produce or sell once labour and overhead are properly allocated.
The key idea is to shift your thinking from “How much am I making overall?” to “How much am I making per unit of effort?”
Once you start measuring profitability this way, it becomes much easier to identify which activities are worth scaling, and which ones are simply consuming time without delivering meaningful returns.
Tip #3: Use a Profit & Loss statement, not cash in the bank
One of the most common mistakes business owners make is using their bank balance as a proxy for profitability. While cash is important for day-to-day operations, it does not tell you whether your business is actually making money.
A better tool is a Profit & Loss (P&L) statement, which shows your revenue, expenses, and net profit over a specific period of time.
A business can have a strong bank balance while still being unprofitable, for example if:
- Customers have paid in advance for work that hasn’t been completed yet
- Loans or financing have increased available cash
- Expenses have not yet been paid or recorded in full
- Revenue is delayed, but costs are already incurred
- The business collects HST or other taxes and pays them after the year is over
On the other hand, a business can appear cash-poor while still being profitable if:
- It has made recent investments (equipment, staff, growth costs)
- Customers have not yet paid outstanding invoices
- Revenue has been earned but not yet collected
The key difference is that cash measures timing, while profit measures performance.
A P&L statement matches income to the expenses that were required to generate it, giving you a clearer picture of whether your business model is actually working.
If you want to make better decisions about pricing, hiring, or scaling, you should always rely on profit, not cash, as your primary measure of success.