I hate to admit it, but when I first started in business, I didn’t track my numbers at all. It felt tedious, time-consuming, and unnecessary. I thought if I simply devoted all my time to my craft (what I considered “running my business”), the numbers would take care of themselves.
They didn’t.
After years of spinning my wheels though, I did finally realize there are some numbers that I absolutely must know. Knowing them has helped me make more money, given me greater freedom, and allowed me to grow my business drastically faster and stronger than before.
If it doesn’t seem like your business is making as much money as it should be, I invite you to learn from my mistakes and accelerate your business by properly tracking the numbers you must know.
Warning: Some of this stuff can seem insultingly simple, but failure to track in small business is more rampant than most people realize and definitely more devastating. Tracking these numbers is not complicated, but it is vital. Don’t let the simplicity fool you.
Net Profit
No matter what business you are in or how small your business is, a bedrock metric that you must know is your net profit. Calculating net profit is really simple. Just subtract your total expenses from your total revenue.
Revenue is all the money your business earns from selling its products or services. This does not include money contributed by you or lent from outside lenders.
If you are in the lawn mowing business and you mow 10 lawns, earning $50 per lawn, then your revenue is $500. Easy enough.
Your expenses are every dollar that you spend to produce that revenue. This includes things like supplies, equipment, fuel, cost of inventory, and money paid to laborers.
So, in our lawn mowing example, if to mow those 10 lawns, you purchased a lawn mower for $100, gasoline for $50, and paid me $100 to help (which I was happy to do), your expenses would total $250.
Now we have enough info to calculate our net profit.
An accountant would call the above equation an income statement, simple though it may be. More down-to-earth folks like me and you call it a Profit and Loss Statement (or P & L if you are really hip). But the entire purpose of an income statement/P & L is merely to determine that magic number: net profit.
Net profit tells us how much money our business is really producing. This is important because many business owners like to brag about the size of their business in terms of revenue. But revenue is meaningless.
A business that earns $1,000,000 in revenue but requires $1,000,000 in expenses is worth absolutely nothing. One that earns $1,000,000 in revenue but requires $1,100,000 in expenses is worth even less. And yes, lots of those businesses exist.
Adequately calculating net profit exposes most businesses to be not as sweet as they first appear. That’s why most small business owners don’t do it.
Back to the lawn-mowing. It sounds cool to say you made $500. It sounds half as cool to admit you only made $250. Facing the facts can be painful. But we are in business to earn a profit, so we want to know when we are and when we aren’t.
Knowing your net profit is really only helpful if you analyze it over a certain period of time. Knowing you made $1000 of net profit is nice, but we need to know if that took a week, a month, or a year. In a service business, a per hour calculation is even more telling.
At the least, every business owner needs to know what their net profit is on an annual basis. But in most ventures, you’ll also want to know your net profit each month. Comparing the months over the course of a year will illustrate any seasonality to your business (which almost all businesses have) and will provide many more insights (i.e., when do we need more help, what time of year do we need more marketing, when do we need to order more product, etc.)
The first action step for any business owner that wants to get a better handle on their business is to calculate their net profit. Warning: You may discover that you aren’t really making as much money as you thought. If so, don’t be discouraged. Acknowledging that fact is the first step to correcting any issues that are holding you back.
