Starting a business is fun, agreed? Running it and keeping it going? Not so much.
See, it’s not enough to be passionate about your business, although that’s definitely a huge part of it. But not knowing whether you’re making or losing money can cause a lot of problems down the road, not the least of which is making you worry about whether your business is going to be a success.
Why do I need to know whether I’m earning or not?
As an online seller or a freelancer, whether you’re just starting out or you’ve been in business for some time, you know that every cent counts.
As a small business, you don’t have the security (yet) that bigger businesses have after being around for some time, and you’re probably even still working on making enough to recover your capital. You also probably don’t have enough to cover unexpected losses or emergencies at your business.
If you’ve just started out as a freelancer or solopreneur, you’ll need to know whether you’re making or losing money right away. If it turns out that you are losing money, knowing this sooner means you’ll be able to prevent bigger losses as soon as possible, either by changing strategies or shutting the business down.
Knowing whether your business is making money or not will also help you file your taxes. That’s because it will be easier for you to know which items are tax deductible, which in turn means you’ll be able to get some money back.
Keeping track of your earnings and losses is a good practice that will make it easier for you to pass this work to your future employees.
What are the basics that I need to know?
First of all, you need to know the difference between income and profit. Income is the money you made during a certain period of time; profit is what’s left after you deduct, or pay all of your business expenses.
Expenses don’t just cover the cost of the item or service that you’re selling, but also the rent and taxes you pay, along with your utility fees, the salaries of your staff (if you have any), and other expenses. If you have minimal, zero, or even negative profit, you are definitely losing money.
You’ll need to also know about gross and net margin. Gross profit margin is a percentage that measures the financial health of your business by showing the difference between income and expenses. Net profit margin is a percentage that measures the “survivability” of your business by showing the difference between profit and expenses.
How do I know whether I’m earning?
Here are the formulas you can use for calculating gross and net margin:
- Net profit = gross income – expenses
- Net profit margin = [(gross income – expenses)/gross income] x 100
Say, for example, you design your own characters and you made stickers with these characters that you sell online. One sheet of stickers is ₱15. Your expenses, or the total cost for printing those stickers is ₱13, so your profit for every sheet of stickers you sell is ₱2.
Let’s say that one day, you were able to sell 10 sheets of stickers, so your income for that day is ₱$150 (₱15 x 10) while your net profit is (₱2 x 10) is ₱20. Meanwhile, your net profit margin is 13.3%. This means 13.3% of the total expense for all 10 sheets of stickers goes back to you as profit.
The good news is you have a positive profit which means you are earning. The not-so-good news is that this doesn’t necessarily mean you’re earning well. A 13.3% or ₱20 profit every day (assuming you only sell one kind of stickers and nothing else) may give you a slow return on investment (ROI).
How else can I tell whether I’m earning or losing?
You’re earning if your net profit at the end of every month is enough to pay for growing your business—hiring staff, for instance, or getting better Wi-Fi—and you have money left over afterwards for yourself.
You’re also earning if you’re recovering your capital or investment much faster than you expected.
You’re losing or breaking even if your net profit is just enough to keep things going but is dangerously low. This can happen if what you’re selling is cheap, but costs a lot or has a lot of expenses to produce, and doesn’t sell very often.
You’re also losing if, after a considerable period of time, your total net profit still isn’t enough to pay off your business loans.
Do you need help with your accounting? Ask an accountant from one of our Partner Firms, today.
