Welcome to measure the metrics that matter for your business finances! I am so excited that you are diving into understanding your business financials better And getting an understanding of them.
If you have a bookkeeper, an accountant, or a CFO, which is a Chief Financial Officer, this is a great time to work with them on understanding these numbers more. However, it is great that you are doing this as it’s important. You should have access to this information yourself and understand how to interpret it yourself so that you don’t have to rely on somebody else or wait for a turnaround time to have this information.
First, I really want to address that there’s a lot of information in the online business space, about business financials because so often people are quoting what they made last month, what they made last year, what they made in their last launch. And what they’re not telling us is how much their expenses were, how much they paid themselves, if their business has any money leftover or not after all the expenses are paid, and they’re paid. We’re not getting that information. And that’s important for you to know. While it is aspirational or it’s inspirational for us to hear sometimes the potential of what there is out in this online business world for revenue, we really have to understand that sometimes that can be told to us as a vanity metric.
When we are looking at business financials, if you have something like QuickBooks, or Xero, please open them up, log in and download your income statement, which is also known as a P&L or a profit and loss statement. And then if you have a spreadsheet you’re tracking from, it probably mirrors how the income statement is set up or at the top, it’s all of the money that you’ve made, then the middle is all of the expenses. And then the bottom is what is left over as profit. And then profit can be reinvested in the business or you can pay yourself out of bonus, there’s different things there that we won’t get into quite now.
But just to understand the context of profit. And so revenue and profits can also be called top line and bottom line. And that is because it is usually at the top of that spreadsheet, but definitely at the top of your income statement. It’s that revenue. And then the bottom is your profit your income. And so we’re going to look at that and understand a few numbers coming from there. And I just want you to really focus right now on three numbers. So revenue is the top line. So that’s all of the money that your business brought in. Whether it is and I want you if you have more than one source of revenue to combine them all here. So if it’s from a combination of digital products, and services that you deliver, or maybe you’re you were paid to be featured in something, this is where you would total all of those up and put them.
Then one line, in one cell put in all of your expenses. So right here, we’re not diving into yet where the expenses are, we are just trying to understand how much overall is going out the door.
And then go revenue minus expenses, top line minus the middle part, and get that bottom line number.
Now we’re not going to interpret too much what is going on with this profit number, there’s a book called Profit First, if you are interested. What just matters as a basic understanding is that you want that number to be positive. If that number is negative, that is a red flag and a warning sign that you are spending more than you are making. So we want profit to be at least positive.
And then there are different targets that you can have for your business. So just understand how much money overall is your business bringing in. How much is it spending and how much is left over.
Now if you want, you can do a bit of a calculation here to understand profit margin. So if your business brought in a total of $10,000 in revenue had $8,000 in expenses, that is $2,000, which is 20% profit margin.
So I am excited for you to enter these three numbers and to understand how they are at play. And then when you look at that profit, when you see how much that number, that dollar value is what the percentage is positive or the negative, like if it’s minus whatever dollars then you can start having a look at what you might want to change around those. But first, let’s track those numbers and see where they’re at.