Sales are rolling in and you’re feeling great. Do you know what to do with that money? Do you know if each sale is profitable or are they burning a hole in your pocket? You need to learn how to manage business money, so you can avoid common bookkeeping mistakes and build a profitable business for the long-term. 

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How to Manage Business Money the Wrong Way 💸

Imagine you just got paid by your first real customer – no, your family doesn’t count. 😉

If you’ve already had plenty of sales, think back to your first. 

Close your eyes and sit with that joy, just for a moment. 

Feels good doesn’t it? 

It’s a bit like magic – it’s an aperture-widening experience. Suddenly, what was once an idea is now real. You’re excited and you should be!

Now, what do you do with the money? Maybe reward yourself for all of your hard work? Or, pay down some of your student loans? It’s tempting to spend it all with glee. 

Not to be a responsible buzzkill, but there’s likely plenty more to do before you break-even on what you’ve invested into the business so far. 

| RELATED: How to Make a Small Business Profitable with 1 Simple Equation

You absolutely should celebrate, but some (possibly all) of the money you earn in revenue needs to be reinvested back in the business to cover costs, taxes, and other expenses. 

Common Bookkeeping Mistakes

As you learn how to manage business money, know that you are making all too common bookkeeping mistakes if you: 

• Mix your business money with your personal finances
• Fail to track sales or other metrics
• Don’t set money aside for taxes or other fees
• Spend your sales revenue before accounting for the costs of running the business

While Rookie Smarts can be extremely useful for a new business owner, these common bookkeeping mistakes can lead to surprises (not the good kind) down the road. 

But, don’t worry – this article (which is part of my Ultimate Small Business Financial Health Guide) will help you begin to develop good money management skills in business and, hopefully, avoid those pitfalls.

Let’s Start with the Difference Between Sales & Profit

If you want your business to grow sustainably, then you can’t just stop at sales, you need to think all the way through to profit in order to learn how to manage business money.

Let’s explore a few different profit calculations – some quick math you can do to make better decisions about how to manage business money effectively. 

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Effective Money Management Skills in Business Example 01: Gross Profit Margin 💰

Your Gross Profit Margin is a measure of how profitable your products and/or services are, after considering only the direct costs of those products and/or services. 

This is a simple but critical part of organizing Small business bookkeeping

If you’re not profitable here, you’ll only deepen the hole you’re in after accounting for operating expenses and taxes. 

Here’s the formula: 

Key Terms:

Total Revenue is the money made from selling your product or service, less returns and discounts. It’s the units sold multiplied by the price. 

Cost of Goods Sold includes the cost of producing and/or providing your products or services, like raw materials, packaging, supplies, etc. 

Gross Profit is the profit generated by Total Revenue less the Cost of Goods Sold (Total Revenue – Cost of Goods Sold = Gross Profit).

Example:

Let’s say you sell a service for $200 and it only costs $80 to provide, then your Gross Profit for that individual service would be $120. 

Your Gross Profit Margin is, therefore, 60% for that service ($120 / $200 = 0.60 = 60%). 

What Does That Mean?

A Gross Profit Margin of 60% simply means that 60 cents of every dollar generated in revenue goes toward your profit, before accounting for operating expenses, interest, and taxes.

Conversely, it means that 40 cents of every dollar generated in revenue pays for the cost of producing or providing your products or services. 

If you have a Gross Profit Margin that is greater than zero, you are making some return on what you invested. 

But, what does a “good” or “healthy” profit margin look like? 

Well, think of it this way: the lower your Gross Profit Margin, the more you’ll have to sell in order to break-even, let alone turn a profit. 

Remember, this is before operating expenses, interest, and taxes. So, this number is only going to go down once you factor those into your Revenue. 

The higher your Gross Profit per transaction, the easier it will be to make the overall business profitable. 

Checking in

Learning how to manage business money can feel like a big, overwhelming topic.

How are you doing?

Just take it one step at a time – feel free to pause reading and try some of these formulas if that helps you process what you’re learning about.

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Effective Money Management Skills in Business Example 02: Net Profit Margin 💰

Your Net Profit Margin is a measure of your overall business profitability – it’s the final profit metric, after all costs, expenses, and taxes are paid. 

Here’s the formula: 

Key Terms:

Net Income is the total financial gain after all costs, expenses, interest, and taxes are accounted for. It’s your overall profitability within a period of time. 

Total Revenue is the money made from selling your product or service, less returns and discounts. It’s the units sold multiplied by the price. 

By the way, you can find net income on the income statement. 

| RELATED: How to Manage Small Business Finances And Spark Your Imagination with an Income Statement

Example:

Let’s say your total revenue for the month was $10,000 and your net income for the same month was $4,000. 

That would yield a Net Profit Margin of 40% ($4,000 / $10,000 = 0.40 = 40%). 

What does that mean? 

A Net Profit Margin of 40% means that, after accounting for all costs, operating expenses, interest, and taxes, 40 cents of every dollar generated in revenue goes toward your net income (profit). 

Conversely, it means that 60 cents of every dollar generated in revenue is eaten by costs. 

Think of these percentages as clues – they point to how easy or difficult it will be to maintain profitability. Lower profit margins will put stress and pressure on the business each month.

| RELATED: How to Lower Business Expenses & Increase Profitability with 1 Essential Idea

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How to Manage Business Money the Right Way 💰

Effective money management skills in business require pausing to think long-term about the overall viability and profitability of your business. 

The two metrics named above, Gross Profit Margin and Net Profit Margin are two quick ways to get a pulse on your profitability. 

As you make decisions about your business, call these percentages to mind – are these acceptable numbers? Is this where you want your business to be? 

If not, consider reinvesting in the business to improve your profitability. 

You should also reflect on your financial goals too before making a decision…

| RELATED: 3 Powerful Steps to Setting Clear Financial Goals For A New Business

…and, of course, check that you’re even in the right mindset to learn how to manage business money.

| RELATED: How to Manage Money in Business Always Starts with a Mindset Boost

To make thoughtful financial decisions and learn how to manage business money effectively, you can’t let the excitement of a fresh sale cloud your thinking. 

Unfortunately, excitement and stress have similar effects on your ability to think clearly – they can both blind you to other factors, creating a kind of tunnel-vision. 

You’ll generally improve your money management skills in business if you can confront, rather than avoid the math, giving yourself a clear view into the financial performance of your business. 

It helps, therefore, to develop a habit of pausing to reflect, making sure you’ve got a full picture before deciding how to use your profits. 

If your business needs a financial check-up, you might like to learn more about my Business Financial Health Checklist!

| FREE CHECKLIST: You Absolutely Need This Simple Business Financial Health Checklist

Learn how to do bookkeeping for small business in excel

You can track everything in a basic spreadsheet application. It doesn’t have to be anything too big or complicated – just start by tracking the money that goes in and the money that goes out.

And, if you’re ready to get really serious, learn how to build an Income Statement with another of my articles.

| RELATED: How to Manage Small Business Finances And Spark Your Imagination

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Reflect on the Health of Sales, Profit, and Cash Today 😅

Take a moment to reflect. This is an opportunity to pause and build some self-awareness about that state of your profitability today, so you can learn how to manage business money more effectively.

Take a mini Self-Assessment…

What’s the state of your profitability today?

Consider the options below, then select the statement that best aligns with your reality. Tap or hover your cursor over each card to reveal more information.

Keep in mind, there’s no “correct” answer. It’s just an exercise to help you build some self-awareness. 

It’s also not about being a “4” all the time. You’ll have moments that feel like 4s and moments that feel more like a 1. 

And, you’re not alone there – for some parts of my business I feel like a 4, but I’m often a 3 or even a 2 on some days depending on what else is going on in my life. 

Fluctuating is normal and expected when you’re starting something new.  

Profitability is a common financial growing pain for new small business owners. And, you can learn more about how to tackle it in my Small Business Money Management Email Course.

|COURSES: 4 Amazingly Simple Email Courses For Small Business Owners

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You Need to Learn How to Manage Business Money – Start Here 🤓

To learn how to manage business money, the key is to (1) notice how you’re thinking and feeling as you prepare to make decisions, and (2) be objective about the data in front of you. 

In those moments, you can challenge yourself to get into a Growth Mindset about whatever challenge or decision is in front of you. 

By the way, adopting a Growth Mindset is essential for new small business owners. And, it’s one of the three essential entrepreneurial skills you can learn more about in my workbook.

| WORKBOOK: How to Run a Business Successfully with These 3 Essential Entrepreneurial Skills

Make sure you’ve thought past your positive sales numbers, all the way down to profit before you make some of those common bookkeeping mistakes we explored earlier. 

As with all things, you’re not going to get it right every time. Just take it one decision at a time.