Unless you are a billionaire flying around on a private jet sipping a cold beverage in your cashmere sweatpants, chances are you have some hangups about money. Do I make enough money? Can I provide for my family? What will I do if I lose my income and can’t make my mortgage payments, medical bill payments, or kids college fund payments? As a business owner, these questions get more complicated. I’m not usually surprised when small business owners don’t have a clear picture of the financial health of their business, because I personally share many of the fears and money hang ups that prevent people from taking an honest look at their finances. Not only can it be complicated to track this information, it’s also not particularly fun (unless you’re an accounting geek in which case -- kudos).
Luckily, there are countless software programs out there today that make it very easy to track your business financials easily and (mostly) painlessly. We use a combo of Square, Xero, and good ol’ fashioned Excel spreadsheets to track the financial health of our business, and today I’m sharing what numbers we track, why we track them, and what I do with the data to clearly understand how my business is doing from a financial perspective, but also improve & get more efficient so we can grow!
A few caveats before I tell you about the 3 numbers:
- Depending on your business model, you may want to be looking at these numbers in a slightly different timeframe than what I do. For example, we run a bakery so I look at our profit & profit margin numbers quarterly instead of monthly. The reason I do this is because we often sell our product before we pay for ingredients. We pay most of our suppliers 7-30 days after the ingredients are delivered. You might prefer to look at these numbers at a different frequency...so keep that in mind.
- Don’t let fear stop you from looking at these numbers! Especially if you’ve never tracked this data, you might not like what you see when you start really diving in. Just remember that this data is another tool in your arsenal to make targeted improvements to your business. The ultimate goal is to build a sustainable business that improves your life + the life of your employees. This exercise should help you highlight areas you can target to make improvements. The first step is understanding what you’re working with, so just rip off the bandaid and take a hard look at where things are at.
- I am not an accountant! These are truly “layman's terms” explanations of these numbers, and these tools are simply what I use in my business to gain insight into the general health of my business. There are certainly different ways to slice and dice this, and more detailed/complicated ways to look at your business’s financial health. Please use this as a jumping off point, and adjust based on the needs of your business.
" Don't let fear stop you from looking at these numbers! "
OK … Let’s get into it!
Profit + Profit Margin
Calculate profit by subtracting total expenses from total sales. This will be a dollar amount. Calculate profit margin by dividing your total profit by your total sales. This will be a percentage. Easy, right!?
Grab a copy of the Excel spreadsheet I use to calculate these numbers here...you can customize it based on the needs of your business!
It may take you awhile to sift through all your records to get at this data, but it’s really worth the time it takes every month to sit down and sort through it. Your total profit tells you how much money your business made in a given week, month, quarter, year. The profit margin helps you track how your business is doing over time, and also lets you compare your business to other businesses in your niche or industry (if that’s important to you).
If you want to compare your numbers to other businesses in your industry, NYU’s Stern School of Business publishes a database of profit margins across many industries in the United States, which you can find here. (They also have an international version, linked on this page.)
Once you have these numbers in hand, I would recommend you re-calculate them every month. I personally bucket things by broad categories, so I understand a finer level of detail about what I’m actually spending money on every month (the exact categories I use are services, equipment & supplies, construction & renovations, payroll, cost of goods sold/ingredient cost, rent, utilities, insurance, loan repayments, licenses, donations, membership/association fees, office supplies & software, POS fees, and taxes). Track these over time and you will start to notice patterns, and areas to optimize costs!
One thing I feel really strongly about is that it’s not “normal” to have your profit margins be low (or even negative) when you first open your business. I understand that statistically, most businesses take a while to get up and running and you should have a realistic outlook about your business. However, your goal should be to build a sustainable, profitable business. If you find yourself going months and months without being profitable, that isn’t ok! You need to take action based on these numbers to improve and work towards building a profitable business. OK, end rant.
" Your goal should be to build a sustainable, profitable business. "
If you want to download a free copy of the exact spreadsheet I use to track our profit + profit margin every month, you can grab that below!
Labor Cost vs. Sales
One interesting number that I started tracking pretty soon after we hired our first employees is labor costs vs. sales. We use Square for both our POS system and our timekeeping system for our employees, and they make it really easy to track this number right from the app’s reporting dashboard. If you don’t use Square or you can’t easily track this number from your POS system, you’ll have to do a little more work here BUT I think it’s a super useful metric to look at.
If you aren’t using Square, all you need to do to calculate this number is divide your total spend on labor for a given time period by your net sales for that same time period. The resulting percentage number is your labor percentage of net sales. Easy!
" Use this number as a way to start conversations "
Two things we use this number for are optimizing how we train our employees, and schedule our shifts more efficiently. I would recommend you use this number as a way to start conversations. Don’t assume that just because this number is higher (or lower), that you need to take some specific action. This number is a 30,000 foot view and only one metric, but it can be useful to help you start figuring out if you’re spending too much on labor, if you can reduce staff at certain times/days when sales are slower, if you can try to find ways to increase sales on other days, etc. Here are a couple articles to read to give you a little more perspective on this interesting metric:
Remember: don’t look at labor costs vs. sales in a vacuum. Track it over time, and use it to inform a deeper discussion about how you can get more efficient with your labor costs and help your employees grow!
The third and final number I personally find helpful to look at is our daily sales number. Depending on your business, this may be a gross over-simplification and a number you don’t get much value out of but for me, I rest easy at night knowing what our daily sales goal is, and whether or not we are hitting it.
I arrive at this number by basically adding up all of our monthly costs...rent, utilities, average spend on ingredients, marketing budget, payroll, “emergency fund”, donation budget...everything we spend money on or save for every month. Then, I divide that number by 30 to arrive at our daily sales goal number. This number is the bare-bones minimum we need to bring in every day in order to keep the lights on. I also have a “stretch goal” number...this is my dream number, if we hit this number consistently, I feel confident our business is growing and getting better, and I know we can think about expanding or spending money on things outside of the bare-bones budget.
" If we hit this number consistently, I feel confident our business is growing "
For some people, this might stress you out. Your business might not be the kind that makes money consistently enough for this to be useful. You might prefer to have a monthly sales goal, or a weekly sales goal, or something else. But for me, regularly tracking if we are hitting our sales numbers is useful and gives me greater confidence in the health of our business.
Hopefully this article gave you some new ideas about what you should be tracking to understand the health of your business. Don't forget, if you’d like to grab the spreadsheet I use to track our profit + profit margin number, including the exact expense categories we track for our business, I put together a free download you can grab here: