Staying on top of your finances is one of the most important aspects of running a business. If you’re not in control of the money, your business may end up in a sticky financial situation.
A major part of your finances is your business income. Income describes several different financials, not just profit. These are profit, revenue, working capital, and loss and break-even.
Calculating each element isn’t difficult and can easily be done if you’re a small business. However, once you start to grow you may find that hiring an accountant will take another job off your plate. Plus, outsourcing is a great way to grow your business!
What is Revenue? Revenue is the amount of money you take in when you sell your goods or services. It can also be referred to as sales or net sales.
Because revenue is a good indicator of how much money is coming into the business, it’s definitely one you need to keep a closer eye on.
You can calculate gross revenue (how much profit made per item or service) or net revenue. Most businesses just focus on net revenue because it gives the overall picture. However knowing gross revenue is still helpful, because it shows if you have any profit-draining products for sale.
The way you calculate revenue depends on whether you sell products or services.
For products, revenue is calculated by multiplying the number of goods sold by the average price you sell them for.
So: Number of goods sold x average price = revenue
For service-based businesses, you multiply the number of customers by the average cost of service.
So: Number of customers x average cost of service = revenue
This is a basic way of calculating revenue and gives you the overall picture. You can go into more detail and look at things like the total revenue per item in your revenue forecast.
Profit is essentially your wage and the money you get to keep. Having a lot of profit doesn’t necessarily guarantee a successful business as you might choose to invest more money as working capital (more on that later) to grow your business. But it’s still a very good indicator of a healthy business.
If you have investors approaching your business or are actively seeking investment, your profits are a good figure to start with. Profit is often displayed as a percentage and indicates the percentage of profits you keep after expense.
There are two different ways to work out profits, profit margin vs gross margin:
To work out profits you need to do a couple of sums. First, calculate your net income by subtracting your total expenses from revenue.
Total expenses include everything from staff wages to tax, not just the initial cost of the goods you’ve sold.
So: revenue - total expenses = net income
Then you need to divide your net income by revenue. This will give you a figure to convert to a percentage.
So: Net income/revenue = figure
You then multiply this by 100 to calculate the percentage.
So: Figure x 100 = profit%
This figure is the percentage of the money you keep after you’ve calculated expenses. This is a good goal to work towards increasing, but you need to make sure you have smaller objectives in place first that will contribute to the overall profit.
Working capital is the money your business has to operate on a day-to-day basis. It’s what you use to buy things like supplies. It gives a good indication of how healthy business is as it shows what’s leftover.
Working capital differs from profit because it’s the money you need to run your business. Profit is the money you have leftover after you’ve paid all your running costs.
Working capital is calculated by subtracting your current liabilities from your current assets.
So: assets - liabilities = working capital.
Your assets are anything you could sell for cash like tills, stock, and furniture as well as the money you’ve got in the bank. Liabilities are any debts you owe during that year which could be bills or loan payments.
Loss tells you how much money your business is losing. It’s a healthy practice to undertake even if you think you’re accounts are in good shape. This is something you may want to do during discount periods to give you an indication of how you’re faring.
To calculate loss, take the cost you paid for an item and subtract the selling price.
So: Cost - sale price = loss.
Break-even is a good calculation to do when you begin to sell a new product or service. It shows you how much money you need to make in order to break-even and is the point when revenue equals costs. This can factor in everything, not just recouping the initial cost of goods.
There are a couple of ways to calculate your break-even point, here we’ll tell you the units method. This indicates the number of units you need to sell in order to break-even.
To calculate this figure, you need to divide the fixed costs by the revenue per unit minus the variable cost per unit. This might sound complicated at first, but it’s not too bad!
Your fixed costs are the costs that won’t change no matter how many units you sell. That can include the price you paid for the goods in the first place.
Variable costs are things like wages.
So: Fixed costs/(revenue per unit - variable cost per unit) = break-even point in units.
You should sit down and work out your business income, and comings and goings once a month. If you get into this practice, you’ll find it becomes easier over time and you’ll also have a clear idea of what to achieve next month.
If the thought of regular maths makes your blood run cold, you can always hire an accountant!