Is your business profitable? What does that really mean? Is it having a “six-figure year”? Or meeting another arbitrary revenue goal?
Bringing in six figures is great, but if you spend all of that on business expenses, you haven’t made a profit. If you hit your revenue goal but can’t afford to pay yourself, is your business really succeeding?
If you really want to know whether your business is profitable, you’ve got to look at the numbers. And don’t worry — it doesn’t have to be complicated! I’ve got a simple system to help you find the info you need and calculate your profitability.
What does “profitable” mean?
Your numbers — that’s revenue and expenses — determine whether your business is profitable. If you bring in more money than you spend on your business, you make a profit! If your expenses exceed your income, however, that’s a different story.
Revenue – Expenses = Profit
That equation really says it all — if you want more profit, you need to increase your revenue and/or decrease your expenses.
Before you can determine whether your business is profitable, you need to be up to date on your books. Once your books are updated, you can pull a profit & loss or cash summary report. A P&L is helpful, but a cash summary actually gives you a better picture of how your business is doing. Why? A cash summary shows what you pay yourself.
If your business is an LLC, you pay yourself by transferring money from your business account to your personal account. That’s called an owner’s draw. If you run an S Corp, however, you pay yourself via salary, which is a little different. (Feeling confused? Check out my Bookkeeping Basics post.)
It’s critical to understand how you pay yourself, because it affects your P&L and cash summary — those documents that determine whether your business is profitable.
P&L vs. cash summary
OK, so if you pay yourself a true salary (because your business is an S Corp), that money will appear on your P&L.
But if you run an LLC and pay yourself via an owner’s draw, that won’t show up on your P&L! Even though your owner’s draw is a reduction in your business’s equity, you’ll only see it on a cash summary, not a P&L. (I explain Owner’s Draws with colors in this YouTube video, so if you’re still like “wait wha…?”, check that out for a super simple and visual explanation!)
That’s why I recommend using a cash summary to track your revenue and expenses — it gives a more accurate picture, especially if your business is an LLC. Plus, a cash summary also includes your tax payments. It gives a more holistic picture of your business than a P&L report.
Want to make it even easier to figure out whether your business is profitable? Just grab my FREE profitability workbook — you’ll get a better handle on your business finances in no time. Get it here!
Profitability and cash reserves
What happens when you continually dip into your business’s cash reserves to cover expenses or pay yourself? You cut into your company’s equity!
You’ll see this drop on a cash summary, but it’s even easier than that. Just look at your business’s bank statements over several months. Is your balance climbing or dropping? Having more money each month means you’re making a profit. Having less means you’re taking a loss.
So, if you realize that balance is dropping, is it time to start panicking? Not necessarily.
Using cash reserves wisely
Sometimes, it makes sense to dip into your business’s cash reserves:
- If you’re taking some well-deserved time off
- If you’re going on parental leave
- If you’re pulling out money to invest in yourself or the business
Ideally, it’s best to plan ahead for those situations. That way, you can save up some extra cash so that taking a temporary loss isn’t as big of an overall hit on your business.
Moving from loss to profit
So, if you look at your bank statements, P&L, or cash summary and realize you’re consistently losing money in your business, how do you fix it?
- Increase revenue: Launch a new offer or increase the marketing for your existing offers to draw in more customers.
- Decrease expenses: Look at all the things you’re spending money on, and see if you can find places to cut back. (Not sure what all your business expenses are? That’s where bookkeeping comes in!)
There are lots of ways to lower your expenses! Maybe you realize you can cut a software subscription for a program you don’t use anymore. Or switch to an annual subscription to get the discounted price. Or maybe you just avoid the temptation to buy the latest course that’s blowing up your targeted ads on Instagram (talking to myself here)!
Evaluating and increasing your profitability
When you’re determining how your business is doing, the two things that matter most are cash and profit. You want to see a positive number at the bottom of your P&L and an increasing balance on your monthly bank statements. That’s it!
So what’s the easiest way to track those revenue and expense numbers? Bookkeeping, of course! Want some help with your books? I’m your gal!
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