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Understanding the basics of business finances is crucial for you to stay in business and earn good money. And business finances don’t have to be complicated and challenging.
Even if you don’t like numbers, you can learn critical terms and understand how to handle your finances better. Then you can make better business decisions and earn more. Everything starts with the basics!
The amount of money you have received or will receive from your clients (meaning you have made a sale but they have not yet paid).
Let’s say you had 10 clients in 2020, and each paid you 5000; your revenue will be 50 000.
It might get confusing when you see online business owners throwing random numbers. So, let’s look at what they actually mean.
I had a 10k sales month. Or I had a 10k launch. Meaning they sold 10 000 worth of services. They probably did not receive the whole 10k in payments, and that money will come in (unless there will be some failed payments) over the course of the next months.
I had a 10k cash month. That means 10 000 have come into a business bank account. Note it is not a personal account! It might be from what has been sold and paid this month and/or from payment plans from services sold in previous months.
It can get a bit complicated at the year-end. If you sell services on the 20th of December, will it go into that year’s or next year’s revenue? Well, it depends if and how much work has been done this year. But that’s accounting; let’s leave it for now, as I want to keep it simple.
N.B. This number (sales, cash, launch) DOES NOT include expenses & taxes. And most importantly, it is not what you put in your pocket.
There are different levels of profit. If you are a service provider, operating profit and net profit is what matters to you.
Operating – what is left after all business expenses before taxes (and also technically before interest, but that most likely does not affect you).
Net – what is left after all expenses and taxes.
Net profit is what every service provider cares about. It might or might not be (yet) what you can directly put in your pocket, depending on your county’s tax legislation. You most likely have to pay tax on dividends (this is what the payout from net profit to the business owner is called). Or your country might have a special tax regime; this is very individual, so you better consult your accountant or tax consultant.
Example. During the year, you had the following business expenses:
Let’s take your sales number from the previous example – 50 000
Theoretically, you can put those 8000 into your pocket unless you have to pay tax on dividends too. That will reduce your payout by another 10-25% (typical range I have seen as a tax consultant, but it could be also 0%) depending on the country you are in.
Measures the profitability of your business, meaning how successful your business is. The higher the number, the greater the possibility for your business to survive in the long term.
You can calculate the operating profit margin, net profit margin, operating profit mark-up, and net profit margin.
N.B. For service providers – look out for your margin. For product sales – look out for mark-up.
Here is how you calculate margin and mark-up:
Example. Let’s take the numbers from the example above to see how it translates into numbers:
Can you tell me your numbers from last year/last quarter from the top of your head?
If not, I suggest you start doing it. It is the starting point to having a healthy and sustainable business.
I suggest at least 30% operating profit margin for online service-based businesses. I like to keep my business lean; mine is around 85%.
If yours is anything below 60%, I can help you increase it. Then you will have more money in your bank account to fund your desired lifestyle.
How can I help do that?
Book your call now, and I will show you how you can start earning more money today!
find out how to earn more with ease
Would you buy a more expensive product if there isn’t any noticeable difference? No. That’s precisely how your customers think. They will choose a cheaper service provider if they don’t see a difference. Now, take this knowledge and flip it!
You get paid for every hour at a corporate job, regardless of what you do. However, as a service provider, you need to spend several hours to acquire the client who will pay you for the hour. Let’s see the formulas to calculate the actual rate you’re earning!
You hear that someone had a 10k sales month. Or a 10k launch. Or a 10k cash month. What does it mean? Well, these 10k numbers don’t include expenses & taxes. And most importantly, it is not what you can put directly in your pocket!
Laneo LLC has entered into the agreement nr. SKV-L-2022/285 dated 2022-07-07 with the Investment and Development Agency of Latvia to receive support within the Promotion of International Competitiveness program, co-financed by the European Regional Development Fund.
