Mastering Business Financials: From Income to Net Profit
Running a successful business requires a basic understanding of your finances. Every aspect is crucial to your overall success, from tracking your income to managing your net profit. This guide breaks down the four key sections of your small business financials and provides actionable tips on using your earnings wisely. Let’s dive in!
The Four Sections of Your Small Business Financials
I. Income
Income is the total revenue collected from the products or services your business offers. It’s essential to track your income accurately to understand your business’s financial health. This includes all money received before any expenses are deducted.
Example: If your business offers home repair services and you earned $50,000 last month from various projects, that amount is your income.
II. Cost of Goods Sold (COGS) / Gross Profit
COGS refers to the direct costs associated with producing your goods or delivering your services. For home service businesses, this typically includes labor, materials, and other direct expenses like gasoline or tools. Your gross profit is calculated by subtracting COGS from your income.
Example: If you spent $20,000 on labor and materials to complete the projects that earned $50,000, your gross profit would be $30,000.
III. Net Profit / EBITDA
Net profit, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), includes all your business expenses that are not directly tied to the production of goods or services. These expenses often cover marketing, administrative costs, and software fees.
Example: After subtracting $10,000 in marketing and administrative costs from your gross profit of $30,000, your net profit is $20,000.
IV. Net / Net
After covering all expenses, the remaining profit is known as net/net. This is the amount you can use to pay yourself, reinvest in the business, or pay down debt. It’s the true measure of your business’s profitability after all obligations are met.
Example: If you decide to reinvest $5,000 back into the business and use $5,000 to pay down debt, you would have $10,000 left as take-home profit.
How to Use Your Business Profits
Pay Down Debt
Paying down debt means paying off the notes on the assets your business owns. This could include property, vehicles, or long-term liabilities such as loans.
Review your outstanding debts and prioritize paying down high-interest loans first.
Reinvest Into the Business
Reinvesting profits into your business means acquiring more assets or improving existing infrastructure. This could involve buying new equipment, expanding your service area, or enhancing your marketing efforts.
Identify key areas where reinvestment can drive growth and allocate a portion of your profits accordingly.
Pay Yourself
Paying yourself is often referred to as a distribution. It’s the money you take home after all business expenses are paid.
Set a regular schedule for distributions to ensure consistent personal income without disrupting business cash flow.
Revenue Projections
To grow your business, it’s crucial to set realistic revenue projections and create a plan to achieve them. This involves understanding your market, infrastructure needs, and financial capabilities.
Example: If your goal is to grow from $100,000 to $1,000,000 in revenue, ensure you have the customer base, infrastructure, and capital to support this growth.
Break down your annual revenue goal into monthly targets and track progress regularly.
Cost of Goods Sold (COGS)
COGS includes the direct costs associated with service delivery, such as labor, materials, and subcontractor expenses. Keeping COGS in check is essential for maintaining profitability.
Example: For a painting business, COGS would include the cost of paint, brushes, and labor.
Regularly review and negotiate with suppliers to keep material costs low and improve gross profit margins.
Additional Resources
For a deeper dive into managing your business financials, check out these helpful resources:
Watch these videos to gain insights on effective financial planning and budgeting strategies.
Conclusion:
Understanding and managing your business finances is crucial for long-term success. By breaking down your income, COGS, net profit, and net/net, you can make informed decisions on how to use your profits wisely. Implement these strategies and watch your business thrive.
Unlock your business’s true potential! Contact us today for a complimentary consultation to optimize your finances and propel your growth. Transform your data into powerful, actionable insights and achieve unparalleled success!
