Every Successful entrepreneur must know their business numbers to truly maximize success!
Only 40% of small businesses are profitable.
82% of businesses fail because of inconsistent or insufficient cash flow.
· Here are 5 key formulas that you must know and measure at all times within your business
· 1. Net Income
· Net Income = Revenue – Expenses
Example: If you earn $25,000 in revenue and have expenses of $30,000
Your Net Income = -$5,000
· Net Income (Net Profit)
· Also referred to as net earnings or the bottom line –
· This formula is important because it tells you the amount your business is profiting or losing each month, quarter and year.
· 2. Cost of Goods Sold (COGS)
· COGS = Beginning Inventory + Purchases During the Period – Ending Inventory
Example: Let’s say you have beginning inventory of $6,000. You make purchases valued at $5,000 during the period and your ending inventory is $1,000
COGS = $6,000 + $5,000-$1,000
COGS = $10,000
· COGS Formula is important because it helps you to set the right pricing for your products and services. You need to price items at the right price point so that you will generate a profit.
· If you know your COGS you can set prices that allow you to have a healthy profit margin and determine when prices need to increase.
· 3. Break-even Point – tells you how many units or products/services you have to render in order to break- even
· Break-even Point = Fixed Costs / (Sales Price per unit – Variable Cost Per unit)
Example – If you’re a T-shirt business and you sell T-shirts for $14.95 and you have monthly fixed costs of $2,500. And your variable costs per unit are $5.40
Break even Point = $2,500 / ($14.95-$5.40)
Break even Point = 261.78
You need 262 T-shirts to break-even
· Once you exceed your break-even point you will then start generating a profit
· Break-even point is the number that you need to hit in order to cover all of your cost so that you are not losing money.
· 4. Return on Investment (ROI)
· ROI = [Investment gain – Cost of investment) / Cost of Investment x 100
Example: You invest $5,000 into your marketing strategy. Your marketing strategy leads to a gain of $8,000
ROI = [($8,000-$5,000) / $5,000] x 100
ROI = 60
Which equates to 60%
· ROI is important because it lets you know whether the investments that you make are beneficial. It lets you know what you are getting in return for what you have invested or what you have spent
· 5. Profit Margin
· Profit Margin = (Net Income / Revenue) x 100
During a month, you have a net income or net profit of $3,000. Your revenue for the month was $10,000
Profit Margin = ($3,000 / $10,000) x 100 = 30%
This formula is important because it measures your business’s profitability and it’s expressed as a percentage. It measures how much your business keeps from its earnings.
