Starting a business can be an exciting venture, right? But when it comes to daily operations and financial management, the excitement can quickly fade. It’s not sufficient to be passionate about your business; you need to know whether you’re turning a profit or facing losses. This knowledge is crucial to the long-term success of your business.


Why is it important to track your earnings and losses?


Whether you’re an online seller, freelancer, or a small business owner, every cent matters

Small businesses, in particular, often lack the financial security of larger enterprises, and you’re likely still working to recoup your initial investment. Additionally, you may not have a financial cushion to handle unexpected setbacks.

For new freelancers and solopreneurs, understanding your financial standing is vital from the start. Identifying losses early allows you to make necessary adjustments to your strategies or, in extreme cases, consider closing the business. Moreover, having a clear picture of your profitability simplifies the process of identifying tax-deductible items, potentially leading to tax refunds.

Maintaining accurate financial records is also a smart practice, making it easier to delegate this task to future employees.


So, what are the core basics I need to remember?


First, differentiate between income and profit. Income represents the money you earn during a specific period, while profit is what remains after covering all business expenses. These expenses encompass not only the cost of goods or services but also rent, taxes, utilities, employee salaries (if applicable), and other financial outlays. If your profit is minimal, zero, or negative, you are operating at a loss.

Understanding gross and net margins is also crucial. The gross profit margin measures your business’s financial health by indicating the difference between income and expenses. The net profit margin, on the other hand, gauges the sustainability of your business by revealing the difference between profit and expenses.

How can you determine if you’re earning? Here are the formulas for calculating gross and net margins:

Net profit = gross income – expenses

Net profit margin = [(gross income – expenses) / gross income] x 100

For instance, imagine you design and sell stickers featuring your characters. Each sheet of stickers costs ₱15, and the expenses, including printing costs, total ₱13. Your profit per sheet is ₱2. If you sell 10 sheets in a day, your daily income is ₱150 (₱15 x 10), and your daily net profit is ₱20 (₱2 x 10), resulting in a net profit margin of 13.3%. This means 13.3% of your expenses are returned to you as profit.

A positive profit indicates you’re earning, but a low net profit margin may mean a slow return on your investment.


How else can you determine your financial status?


You’re earning if your monthly net profit covers business expansion expenses, and you have money left for personal use. You’re also earning if you recoup your initial investment faster than anticipated.

Conversely, you’re either losing or breaking even if your net profit barely sustains your operations and is at a precarious low. This can occur when your products or services are inexpensive but have significant production costs and low sales frequency. 

Lastly, you’re losing if your net profit fails to repay your business loans over an extended period.