Profits: You Manage What You Measure – Don’t Make This Mistake
Like many small business owners, I just sort of jumped in the deep end when I started, and I didn’t have a lot of business systems set up.
After a disastrous attempt at an upgrade of my online store that left me deeply in the red and needing to borrow money from our family finances, I had to get serious.
I had been tracking my revenue but not my expenses.
I also wasn’t paying myself a fixed salary, but just taking money out of the business when I needed it. I stopped doing this and began to track not only revenue but expenses.
I now have a tricked out spreadsheet that calculates profit after transaction fees and taxes. Fixed expenses (my salary, server costs, advertising, etc.) are built into the sheet. I diligently enter sales and expenses as they come in and am always delighted when I get to that point in the month where every penny I earn is pure profit. I also have a column that calculates the cumulative running profit for the year.
Getting a handle on what’s going in and what is coming out has been an excellent tool in helping me make decisions.
I reviewed a lot of the advertising that I ran and pulled almost 80% of it. It was scary. I saw a drop in traffic, but not profit. The simple fact is – and I could tell by using Google Analytics – many of the banners I had out there just weren’t converting.
I can also now forecast better about where I can make extra expenditures and I’m getting more ruthless about determining whether or not a certain activity will provide enough return on investment.
It is important to experiment and take risks; measuring and managing your profits and losses helps to make sure those risks are calculated and understand how much risk you can afford to take.
Are YOU measuring your income and expenditures properly? If not, why not?
Image source: Death to the Stock Photo