Most people start a business because they’re good at something: baking, coding, fixing cars, designing logos. Very few start one because they love spreadsheets. But the businesses that last tend to be run by owners who understand a small set of numbers and check them regularly.
You don’t need an accounting qualification. You need to know what six or seven figures mean, where to find them, and what to do when they move. This guide covers each one briefly and points you to a fuller explanation when you want it.
1. Revenue, Costs and Profit
Revenue is what you sell. Profit is what you keep. In between sit two kinds of cost: the direct cost of what you sold, and the overhead of running the business. Separating those two gives you gross profit and net profit, and each one answers a different question. Gross profit tells you whether your product is worth selling. Net profit tells you whether the whole business is worth running.
Read more: Gross profit vs net profit
2. Profit Margin
A dollar figure on its own doesn’t mean much. $5,000 profit is excellent on $20,000 of sales and worrying on $500,000. Margin turns profit into a percentage of revenue so you can compare months, products and competitors fairly.
What counts as “good” varies a lot by industry. A grocery store and a consultancy live in different worlds. See the benchmarks in what is a good profit margin for a small business, and work out your own with the profit margin calculator.
3. Your Prices
Pricing is the fastest way to change your profit, in either direction. A small increase that customers accept goes almost entirely to the bottom line. A price set too low can’t be fixed by selling more.
Two things to get right: know your full cost per unit, including your own time, and don’t confuse markup with margin. A 50% markup is only a 33% margin, and that mix-up has sunk plenty of otherwise sound businesses.
Read more: How to price a product and markup vs margin
4. Break-Even Point
Your break-even point is the amount you need to sell to cover all your costs. Below it you lose money, above it you make money. It’s the single most useful number when you’re deciding whether to launch a product, sign a lease or hire someone, because it turns “can we afford this?” into “can we sell this many?”
Read more: How to calculate your break-even point, or use the break-even calculator guide
5. Cash Flow
Profit and cash are not the same thing. You can be profitable on paper and unable to pay your bills, usually because customers pay you slower than you pay everyone else. Cash problems close more small businesses than bad products do, and they tend to hit hardest when a business is growing.
Read more: Cash flow vs profit
6. Getting Paid
The simplest cash flow fix is boring: send invoices quickly, make them clear, state your terms, and follow up when they’re late. An invoice that goes out a week after the job delays your payment by a week, every single time.
Read more: How to invoice as a freelancer and creating invoices for free
7. Return on Ad Spend
If you pay for advertising, you need to know what comes back. Return on ad spend (ROAS) is revenue from ads divided by what the ads cost. The catch is that a ROAS that looks healthy can still lose money once product costs are counted, so the number you really need is your break-even ROAS, which depends on your margin.
Read more: ROAS calculator: how to know if your ads are profitable
Where These Numbers Come From
Nearly all of them come from one document: your profit and loss statement. Any accounting software will produce it in a couple of clicks, provided your income and expenses are recorded and categorized. If you’ve never been shown how to read one, start with how to read a profit and loss statement.
A Simple Monthly Routine
Set aside 30 minutes at the start of each month and go through the same list:
- Revenue, gross profit and net profit for last month, compared with the month before and the same month last year
- Gross and net margin as percentages
- Cash in the bank, and what’s due in and out over the next few weeks
- Unpaid invoices, oldest first
- Ad spend and what it returned, if you advertise
Write down one thing to change and do it. That’s the whole system. It isn’t complicated, and that’s why it works: a simple routine you actually follow beats a detailed dashboard you never open.
If You’re Just Starting Out
Still at the planning stage? Open a separate business bank account before your first sale. Mixing personal and business money makes every number in this guide harder to find. Then work through our guide to starting your own business, and if you’re setting up in the United States, the overview of legal requirements for starting a business.
This guide is general information, not tax or accounting advice. For decisions with real money at stake, a session with a qualified accountant usually pays for itself.
