If you aren’t a ‘numbers person’ just the thought of the finances in your business may scare you! To help simplify things, today I want to talk about the 3 numbers that I believe every sole trader should be tracking, whether they work full-time in their business or not. These 3 numbers aren’t just critical to measuring the success and health of your business but, thankfully, they’re straightforward to track – even if you have finance-phobia!
Here I’ll show you those 3 numbers, explain why each one is so beneficial and show you your options to make tracking them easy.
In this guide, I only focus on 3 really easy numbers that you can track to help monitor the health of your business. There are lots of other metrics and KPIs but I would recommend you start looking at those ones only once you feel comfortable with the three basic ones below.
The first crucial number to track is turnover. Turnover means everything you get paid for the services you deliver and the products you sell, before deducting any expenses. So, let’s say you’re a social media manager, selling monthly social media management packages at £500 per month and have 5 customers. Your turnover will be £2,500 (£500 x 5).
Generating sales is the number one reason you started a business and it’s a super simple way to measure your success. By keeping an eye on your turnover you can think about the reasons why sales are on the up or which type of sales are particularly successful so you can focus your energy on keeping these numbers on the increase to make more sales.
On the flip side, by keeping an eye on your turnover, if there is a dip you can react appropriately and you’ll have an early warning sign that your cash may start to run low.
2. Break-Even Point
Next, you must always be aware of your break-even point. Break-even point is the point where your business turnover equals your costs. If your costs exceed turnover, then a business is loss-making. And vice-versa, if your business turnover exceeds your costs, you’re making a profit!
Knowing your break-even point is a useful metric to have in your mind because you’ll have peace of mind that you have sufficient income to cover your costs and pay yourself. In effect, its a really simple way to create a sales target for yourself because you know what you have to sell as a bare minimum to cover your expenses.
The only drawback when it comes to break-even is that you’ll have to estimate your expenses, which could be a bit tricky. And because you are using estimates, it’ll be really important that you keep an eye on your monthly actual expenses to watch out for any differences in what you estimated.
Finally, comes tax! Budgeting for your tax bill is an essential part of money management and monitoring how much your business is actually making because a portion of the money you get paid isn’t necessarily yours. You’re going to need to pay tax on your business profits, so you don’t want to accidentally spend your tax money and then not have enough to pay your bill when you file your HMRC return.
The most accurate way to budget for your tax bill is to prepare a monthly income and expenditure statement, so you can see how much profit you’ve made and set aside an estimate for self-employment taxes. Alternatively, every time you get paid you can transfer a percentage of the amount you have received at your highest rate of tax (20%, 40% or 50%) to a deposit account so it’s ready for tax-time.
How to Track Your Numbers
Tracking these 3 essential numbers involves bookkeeping, so you’ll need some kind of accounting system to help you analyse the numbers coming in and out of your business. You can choose between using a bookkeeping spreadsheet or an automated system like Quickbooks (need help deciding which one is right for you? Then read my guide to accounting for the self-employed).
I’ve also created a super simple bookkeeping spreadsheet that’s perfect for sole traders and contains an in-built tax calculator so you can track what you owe, along with a business budget worksheet so you can work out the break-even point of your business.