Know your numbers from the start
Business lesson 1.
Following the interest I received regarding a post I did a few weeks ago — “10 business lessons to learn sooner rather than later” — I decided to do a series in my weekly Wednesday email unpacking each lesson. I use the word “series” lightly, as it may be interrupted by other, more urgent messages. But rest assured, all 11 (there was a bonus) will be covered.
To kick things off…
Lesson number 1 - Know your numbers from the start.
TL:DR - summary from the roundup article
This is a big one. You need to know what your revenue is, what your expenses are, and what your net profit is before taxes. The financial report that reflects this is your Profit & Loss Statement (aka your P&L).
What percentage of your revenue is going to your expenses? What percentage is dropping to your bottom line?
Then you can dig deeper to see where the bulk of your revenue is coming from (which clients/offerings/products). And you can see where you’re spending your money.
This knowledge is powerful. It allows you to make decisions regarding where to double down and invest and where to let things go.
One note before we get started… I’m not a bookkeeper, accountant, or finance professional. That said, I’ve been running a P&L in one form or another (as a business executive, business owner, and business coach) for 20+ years, so I know my way around basic business finances and how to use them as a tool to help you scale.
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What “knowing your numbers” means and why it’s important.
Simply put, if you don’t know your numbers, and I mean really know them, you’re “flying blind.” And if this is you, my guess is you’re stressed and overwhelmed with the very idea of what’s going on when it comes to your business finances. Consider this your opportunity to change that.
Because there’s so much power in knowing exactly where you stand. You can plan for your business and your life. You’ll know what’s working and what’s not, where to double down on your investment of time and/or money, and where to cut. You can create projections based on the personal income you want to generate and plan for the costs to generate the revenue to get you to that income. I could go on… everything comes from knowing your numbers. So let’s dig in.
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Your P&L is your friend.
I say this often because it’s true. At a basic level, you need to understand how much money you have coming in (your revenue), how much is going out (your expenses), and what you have left over (your net profit before taxes). This is your Profit & Loss Statement.
Let’s break it down.
REVENUE: This is the money you have coming in from your client work and any programs, courses, digital, and physical products you sell.
COST OF GOODS SOLD (COGS): If you’re operating a service-based business with no physical products, your COGS is made up of the employee or contractor expenses to deliver your service (not operate your business) plus any online tools you subscribe to specifically to deliver the service (the Adobe Suite or Canva or a client portal platform for example). If you do sell physical products, it’s the costs associated with producing the products and shipping them to you (or your fulfillment center).
GROSS PROFIT: What’s left when you deduct COGS from your REVENUE.
OPERATING EXPENSES: These are the costs to run your business operations. This includes subscriptions for online tools, marketing, meals and entertainment, professional services (e.g. bookkeeper, legal, accountant, business coach), other contractors, payroll and payroll taxes (including yourself if you pay yourself a salary via your business), rent, mobile phone and internet, etc. There’s more but that gives you the idea.
NET PROFIT (before taxes): What’s left after you deduct your OPERATING EXPENSES from your GROSS PROFIT. It’s the money you’ll use to pay yourself (instead of or in addition to your salary), put into business savings, pay taxes, etc.
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Using your P&L in your business.
If you have a bookkeeper managing your books for you, make sure you’re meeting monthly or quarterly to review where you’re at. It’s your opportunity to make sure you understand what’s happening in your business and get your questions answered. If they don’t (or won’t) have a regular review meeting with you, find a new bookkeeper.
If you’re in a position to hire a bookkeeper, list the things you want them to do for you before setting up any calls. For example — do a monthly reconciliation of your books, prepare your monthly financial reports, and meet with you to discuss your books (these are the basics). And when you interview bookkeepers, make sure you’re comparing “apples to apples.”
If you’re not ready for a bookkeeper, fear not… setting this up does not need to be difficult. You can do your own bookkeeping using a tool like QuickBooks Online (QBO), FreshBooks, Xero, and Zoho Books, to name a few. I worked with an awesome bookkeeping coach to do my QBO setup and help me learn how to use it. My books are simple at the moment, so it’s easy for me to manage them.
Last (and not at all least), you can use an Excel Spreadsheet or Google Sheets to run your P&L (I used this method for a long time — sending it to my accountant at the end of the year). If this is you, here’s one Google Sheet sample via Accidentally Retired (make a copy of it) and instructions on how to use it. And here’s another roundup of Google Sheets templates to check out if that doesn’t fit your needs.
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Then you can dig deeper.
Your numbers will tell you a story about your business if you take the time to look.
They’ll tell you:
Your revenue by client — what clients are contributing what amount to your total revenue by month/quarter/year. A tool like QBO can give you this report or you can track this monthly in a Google Sheet.
Your revenue by service offering — which offerings are clients buying and which are they not. Again, a tool like QBO can give you this report or you can track this monthly in a Google Sheet.
How much you’re spending on your team (if you have one). This can be contractors you tap into to deliver your services or your VA or marketing support person.
How much you’re spending on marketing and then digging into which of those investments are “moving the needle” when it comes to revenue generation or the other metrics you’re tracking.
This is information you should look at every quarter and use to make decisions in your business so you can continue to scale.
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The other big thing to keep an eye on is cash flow.
I see this a lot in my clients’ businesses and have experienced it in my own. The goal is to be “cash flow positive,” which means in any given month you have more money coming in than you have going out (including paying yourself). This is your Cash Flow Statement.
Your Cash Flow Statement is impacted by four key factors:
The structure of your service offerings — are you working with clients on a monthly retainer basis; a project basis; or both?
When are your clients paying you?
If on a monthly retainer, do you invoice your clients in advance so that payments arrive in your account at the start of the month you’ve invoiced them for? Or later in the month?
If you’re working on a project basis, are you asking for a deposit to start the work with the balance due upon delivery or completion? And how long is the project?
Do you have chronic late-payers amongst your current client roster? How late? You need to account for this.
How do your expenses (outlays) align with the timing of your client payments (inflow)?
The goal is to smooth out your inflows (revenue) so that they’re more consistent with your outflows (expenses) to avoid going cash flow negative in your business checking account (your operating account). And to have a business savings account set up to cover you when you are cash flow negative in any given month due to an unexpected expense or late payment. Here’s a simple Google Sheets Cash Flow template to get you started.