Note: This is the third in a six part series about business essentials that beauty and bodywork professionals who are independent contractors or who run a business need to know. The series, “Going It Alone,” runs every two weeks. The first installment dealt with motivation and the second installment discussed taxes and record keeping.
One of the most important, if not the most important, aspect of owning and running a business is to know what is happening with your money. Yes, it is much easier to just do your job and hope that your finances are fine, but when you start spending more money than you are brining in, you will start to have a problem.
Here’s the good news: There is one formula you can use to keep track of your finances, and not only is it easy to use (i.e. not a lot of hard math), but it also won’t take up a lot of your time.
For this third part in our “Going It Alone” series, we’re going to go over an easy way for you to figure out your business’ financial situation.
A Few Definitions First
Before we get into the formulas, there are a few definitions you need to understand first.
Expenses: Costs that include advertising, rent, and everything else that’s involved in operating a business.
Net Income: The profit you make on the products you sell.
Revenue: Payments you receive for your products or services.
Finding Net Income (Profit)
Finding how much money you made (or lost) during the course of your business is simple when you use the following formula:
Revenues – Expenses = Net Income
It really is that simple. And guess what? Every business uses it. (Though, to be fair, theirs is probably a little more complicated than yours and deals with MUCH bigger numbers.) To prove it, here’s the income statements (the place where the above formula is recorded) for the Walt Disney Company, Comcast, and Apple.
Here’s an example to give you an idea how you can use the formula and see how it can work for you. (Yes, I am aware that this blog post is starting to look like a math textbook, but stay with me—this really does have the potential to help you better run your business.)
Amanda is a massage therapist that rents a room from a salon for $100 per month, and she is an independent contractor. Last month she made $4,200 from giving massages and $500 in tips. She spent $150 on new lotions and another $200 on other supplies she needs for her business. She also spent $40 in laundry expenses and $45 for advertising her business. She is a member of a professional organization, so she paid $30 in dues and another $250 in school loans. She also paid $60 in quarterly taxes.
Don’t read too much into the numbers because really I just used them to make the math easier (I hate math). Now, let’s break the example down like this:
| Revenues | |
|---|---|
| Sales | $4,200 |
| Income from Tips | $500 |
| Total Revenue | $4,700 |
| Expenses | |
|---|---|
| Rent | $100 |
| Lotions | $150 |
| Supplies | $200 |
| Laundry | $40 |
| Advertising | $45 |
| Dues | $30 |
| School Loans | $250 |
| Quarterly Taxes | $60 |
| Total Expenses | $875 |
| Net Income | $3,825 [$4,700 (Revenue) – $875 (Expenses)] |
This means that Amanda made $3,825 profit in the course of her business. If she isn’t happy with the profit she is making, she can either find additional sources of revenue (add more clients per day, for example) or decrease expenses (Find a different salon with cheaper rent or possibly decrease the amount she spends on advertising).
Now, obviously this example is fairly simple and may not be even close to your own personal situation. But that’s ok. All you have to do is substitute your finances in the formula so you can put it to use for you.
Why would you use this formula? It helps you know exactly how much money you are bringing in and how much is going out the door. And of course there are many other financial formulas that are very helpful for your business that you can look up and use for your business situation.
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