How do I know my business is successful?

Almost three weeks ago we spent several days talking about how to create a basic business plan. Now that you may have written up a rough draft, your next question may be, "How do I know my business is successful?" As you know, success can be measured several different ways, different people have different opinions regarding what success really is. Today our focus is on creating a basic income and loss worksheet so you can determine if your business is bringing in more money than you are spending (one way to define if your business is successful).

In your business plan, you should have decided approximately how much money you planned on spending to get the business going and about how much money you want in return. Today we are going to break down the basics of an Income/Loss statement so that you can determine if you are spending more money than you are getting in return. We are not going to get into high-level accounting here so don't worry. If you already have an accountant working for you, this may help you to understand what they do for you and your business.

An Income/Loss Statement (also known as a Profit and Loss statement or P&L for short) is a standardized method for tracking if your business is making or losing money (determining if your business is successful). The first portion of the Income Statement is to identify exactly what money is coming into your business. The statement typically covers a one month period. There may be different types of income generated by your business, so to make things simple, let's assume that you sell products to people. If you sell different items, you may want to track each item separately. You can use Excel, or some other basic worksheet program to generate a basic Income/Loss Statement. On your spreadsheet, you will want to identify all the items you will be selling. Record the sales for each item from your receipts and then note those numbers down on your worksheet. After you have recorded all the sales for your items, total them up and you have your total Gross Sales for the month.

The next section is to record what you spent to get those items. Cost is what you spent out of pocket to acquire the items you are selling. If you purchased Item 1 for $2.50, and you sold 2 of them in a month, your cost for Item 1 would be $2.50 x 2 or $5.00. So to record your costs, you need to know how many items you sold and how much those items cost you. If, at the end of the month, you still have Item 2 in stock and did not sell it, you do not record the cost for that item. You only record costs for the items you actually sold in that particular month. Your costs for your inventory do not include any electricity, travel, entertainment, etc. type of expenses. Those types of money out are recorded elsewhere. In the Cost section, all you record is how much it cost you to purchase the particular item you are selling.

Once you have recorded your costs for the month, then to figure out your Gross Profit, take your sales, subtract from it your costs, and you end up with your Gross Profit. In the example provided, if your total sales are $35.00 and your total costs are $22.00, then your Gross Profit would be $13.00. So far so good, at this point, you are bringing in more money than you spent. So far your business is successful. Remember, you are only noting sales and costs for a specific month. Do not bring costs or sales forward from other months at this point in time.

Your next item on the Profit/Loss Statement is to record all other expenses. In accounting, there are many, many different categories of expenses, but for tonight, we are going to keep this statement very basic. Also, the assumption is that your business is just starting, and you don't have a whole lot of categories of expenses yet. In your expenses, the best rule of thumb you can use, is did these expenses occur because of your business? For instance, if you eat breakfast every day, even when not doing your business, that cost of breakfast is not to be included as an expense for your business. If, you don't normally go out for breakfast, but this time you did in order to meet someone and show them your products, then that expense for breakfast is related to your business and that should be recorded on your Profit / Loss Statement.

After you have added all the expenses together and totalled them, to determine your Income/Loss for the month, take your Total Gross Profit and subtract from it your Total Expenses. In the example listed, your business is successful for this month because your Total Gross Profit is higher than your Total Expenses.

Please keep in mind, this is a very simplified Income/Loss (or Profit/Loss) statement. The intent here is to help you start looking at your business from a numbers perspective so that you can start measuring your business success by how much money comes in versus how much money goes out.

If you have questions regarding the basic Income/Loss statement, please feel free to contact me at hawgwash1@yahoo.com. If you are interested in starting up a home based business of your own and are not sure where to start, please take a look at http://www.hawgwash.net/ to see if anything there might tickle your fancy.

Until tomorrow...