3 Quick Financial Tips to Analyze Your Profitability

I know many business owners get overwhelmed when they look at their financial statements. What do the numbers really mean? What SPECIFICALLY should you be looking at? Today’s post is going to cover a couple quick financial tips on exactly WHAT you should be looking at on your Income Statement each month to help review if you’re as profitable as you could be in your boutique business.

Let me preface all this by saying that having accurate & up-to-date bookkeeping is going to be key in completing these quick analysis of your business finances. Make sure your financial statements are laid out and organized in a way that helps you clearly see where all your money is coming from & going to each month. 

If you need a sample chart of accounts you can reference to help you make yours more efficient, you can download a copy here: https://www.findingfreedomfinancial.com/coa-template/. 

Quick Financial Tip #1: Review Shipping Income vs Expenses

One of my favorite ways to customize a retail client’s chart of accounts is to ensure that there is both a shipping income account and a shipping expense account. 

The shipping income account allows you to break out this type of income from your actual product sales, so any money you collect from customers doesn’t inflate your product profit margins. 

By separating out your outbound shipping expenses, you can see what you’re having to pay each month to get your amazing products into your customers hands. 

(Remember, any inbound shipping that you pay to get your inventory into YOUR hands should be added to the product cost, and expensed as the items are sold through your cost of goods sold)

By separating out both your shipping income & shipping expense on your P&L each month, you can easily compare these 2 numbers to see if you’re charging your customers enough for shipping, or if you’re losing money on every shipment you send out the door. 

Now, there may be a time when it can be a wise marketing decision to offer free shipping when their cart is over a certain dollar amount. This may be a helpful tactic to help you raise your average transaction value. And obviously in those cases, you’ll be ‘losing’ money on shipping. But, if your profit margins are strong enough, that increased cart value should outweigh the cost of the shipping you pay out of pocket.

Quick Financial Tip #2: Review Your Profit Margin

Often times, business owners get confused between their markup and their margin. For example, I often hear business owners say how they often markup their products 2-3x, but that doesn’t necessarily mean that they’re always able to sell 100% of their products at that full retail price of 3x. 

Margin looks at the overall profitability of the products, comparing the net sale amount (gross sales – discounts), and comparing it to the actual COST of those products.

So, for example, let’s say you buy 10 shirts for $15, and your markup is 3x, you advertise them for $45. Now, you’ve been able to sell 6 at the full retail price, but you end up needing to discount the rest at 25% in order to sell the rest. That brings the total revenue on those shirts 

6 x $45 = $270 earned at full retail

4 x $33.75 = $135 at discounted rate

$405 total net revenue earned on the $150 

Your actual margin is calculated by (Net Revenue – COGS) / Net Revenue, so in this case…

($405 – $150) / $405 = about 63%. 

So, for this example, about 63% of the sales from these shirts is actual profit, after covering the cost of the shirt itself. 

Now, this is just a small scale example. But, every month, you should be doing this type of analysis on your total sales/COGS for the month. That way, you can see what your true product profitability is, versus what you’re just marking your products up by. 

Quick Financial Tip #3: Review Profit vs Debt Payments

My final quick tip is to review your actual profit, or the bottom line on your income statement. This is going to represent the income – expenses in your business for that month, but that doesn’t necessarily mean that all of that is money you get to keep.

Payments that you make towards outstanding debts, or liabilities, are not reflected on your income statement. So, if you earned a $2,000 profit one month, but you need to make a monthly payment of $2,500 towards your startup loan, that really doesn’t mean that you have anything left over.

You can even take this a step further and compare it to what you want to be paying YOURSELF each month, because unless you have elected to be taxed as an S Corp and you have yourself on payroll, any amounts that you pay yourself are not reflected on your income statement either.

So, be sure to take these two things into consideration when reviewing your Net Profit, and determining if you were profitable enough that month.

If you’re ready to dive into some more bookkeeping basics for your boutique, then I want to invite you to watch my free, on-demand training where you’ll learn more about what you NEED to know to DIY your own bookkeeping. You can register for it here.  

If you’re ready to commit to a better bookkeeping process, but need a little help getting started, then I want to encourage you to check out my signature program, Shopify Bookkeeping Made Simple. Inside the course you’ll learn exactly how to setup your own Quickbooks Online account, and how to maintain your bookkeeping each month so you will have financial information that will actually HELP you grow your boutique business. 

Here’s to finding your own version of freedom,