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How do I understand my store's revenue and expenses?

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Cash flow is critical for any business—large or small. It isn’t limited to physical bills and coins you currently have on hand, either.

For an accurate total of your cash, you must include the following:

  • Cash on hand: Undeposited cash collections and other cash for deposit such as customer’s checks, bank drafts, and money orders.
  • Cash in the bank: This includes demand deposit, checking account, and savings account.
  • Cash fund: Money set aside for current and small expenses such as petty cash fund and payroll fund.

Now that the nuanced meaning of “cash” is clear, let’s talk about cash flow.

What is cash flow?

Each business cycle requires a series of earnings and expenditures—also called cash inflows and cash outflows, respectively—to sustain itself. Your cash flow is the net balance of whatever remains after deducting the outflow from the inflow.

As a business owner, you’ll either have a positive or negative cash flow. Positive cash flow indicates a higher amount of cash receipts than cash payments. Conversely, higher cash payments will result in a negative cash flow.

But here’s where it gets tricky—cash flow is not a measurement of profitability. This means having a positive cash flow doesn’t guarantee a profitable business. Negative cash flow is the same. 

Just because a business isn’t getting enough income right now doesn’t mean it’s going under.

What makes cash flow so important, then?

No matter how stable the economy is, business is unpredictable. 

Timely and relevant financial reporting will help you understand the health of your business. And these financial reports need detailed and adequate information to make forecasts and plans to help your business grow.

Your cash flow statement, in this case, is necessary to gauge criterion, like:

  • Liquidity: Your business’ ability to get cash and pay bills whenever necessary
  • Solvency: Your business’ ability to settle long-term debts and financial obligations
  • Amount, timing, and certainty of future cash flows: Your business’ ability to adapt to changing circumstances and opportunities
  • Other aspects of cash flow: How other variables, like fluctuating prices, impact your bottom line 

An agile business is built and supported by four key pillars required in financial reporting: Balance Sheet, Income Statement, Statement of Other Comprehensive Income, and Statement of Cash Flows. And the statements that generally account for the revenue and expenses of the business are the statements of income and cash flows.

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How do I understand my store’s revenue and expenses? 

Start-up owners must know how to account for all business transactions, especially expenses and revenues. This process of recording and managing finances is called bookkeeping. You can run your books manually or turn to accounting software to simplify the process. 

The income statement is the first thing to look at to understand your revenue and expenses. It’s a formal statement that shows your company’s financial performance for a certain timeframe. 

To simplify bookkeeping and to better understand how well your business is performing, you can manage your money and business in one place with a Shopify Balance account. Balance allows you to make smarter business decisions by easily keeping track of the money coming in and out of your business. You can also get a clear picture of your business finances with personalized charts and graphs within the Finances Overview section.

Understanding and calculating revenues

Revenue is a measure of what a company earns by selling goods or services. There’s no doubt that businesses pay more attention to this single item than any other in an income statement because it determines how well their business is doing.

Many businesses pay attention to revenue the most compared to other items on an income statement because it’s the total amount of income you’ve generated. 

But your revenue, however, isn’t your total income. Total income (or gross income) has both revenue and gains: 

  • Revenue: The amount of money your business makes from selling your products or services—or “ordinary” activities 
  • Gains: The amount of money your business makes from other activities aside from selling your products or services

Let’s use a real-life example to illustrate:

Pat started her Shopify store selling sports clothing and equipment. Her total revenue is the total sales in sports clothing and equipment, but her gains come from extra rental income when she allowed one of her suppliers to rent the free space in her warehouse. 

The way most companies calculate revenue is pretty much the same. Here is a simple formula to use: 

Units sold x average price  

or

Amount of customers x cost of a unit provided

You might be tempted to see your gross revenue as how much you’ve made, but what you really want to look at is your net revenue. Net revenue is how much money you’re left with after you account for the cost of goods sold. 

In other words, once you subtract how much money it costs you to make, market, and sell your product, the number you’re left with is your net revenue. 

An easy way to calculate your net revenue is: 

Net Income = Revenue - Profits

It’s important to note that net profit and revenue are directly related, whereas expenses and profit are inversely related.

Understanding and calculating expenses

Every business has expenses, and there are several types to manage. Expenses are, to put it simply, the cost of running your business. Think: Materials to make your products, hardware and software to power your online store (if you have one) or rent for your brick and mortar store, marketing efforts, employee paychecks, and more. 

Here are some of the biggest expenses to track: 

  • Cost of goods: The amount you originally paid your supplier for the materials and labor needed to create your product(s) 
  • Distribution costs or selling expenses: The shipping, insurance, and marketing costs
  • Administrative expenses: This includes utilities, salary expenses, legal and financial, and office maintenance costs
  • Other expenses: This includes unpredictable expenses like tax penalties and repair expenses
  • Income tax expense: The amount of taxes owed during a specific period.

To calculate your total expenses, simply add these categories together. 

How do I optimize my business revenue and expenses?

To increase your net profit, increase your revenue while reducing expenses. While that sounds like a no-brainer, this is tough to do! It can be tricky to reduce expenses, especially when you’re just starting out. 

“ Improving your net profit (the actual money that you keep) requires you to push the effort on driving revenue 📈 and costs 📉.”

Here are some helpful ways to optimize your revenue and expenses:

Use analytics to grow your business

Analyzing product data can help you discover trends and help develop new products for your business. 

If you’re launching a new product, research competing products and customer experiences. With this data, you can create products that better suit your customers’ needs, thereby increasing customer satisfaction and sales revenue.

Pay attention to your data 

Real-time analytics has a lot of benefits. One of the biggest being that you can anticipate problems before they arise and take action early. If you don’t use your data to mitigate problems, you’ll be doing a lot of damage control.

For example, if your inventory management system indicates you’re about to run out of a product before a big sale—like Black Friday or Cyber Monday—and you don’t order ahead of time, you’ll be left scrambling to replace the inventory after the fact. 

Data should be seen as a company-wide asset. When the right people have access to relevant data, they help you run your business more efficiently. This also reduces costs, time, and wasted resources, which saves your business in the long run. 

“Increasing revenue takes time, investment, and hustle. Growth is difficult. A small business may have already reached their ceiling for what they can do in a year. Decreasing expenses is far easier. Trimming the fat immediately improves the bottom line.”

Nurture your employees’ skills

When you match your employee’s skills with their responsibilities, you’ll see a huge improvement in your business—especially with employee morale. 

Once you understand your team’s strengths and weaknesses, do your best to help them grow and evolve their skills. It’s way more expensive to hire and train new people than it is to invest in your current workforce. 

In fact, according to a report from Training Mag, the average small business in the U.S. spent roughly $1,886 on each new employee. Those costs can be major for newer business owners who are just getting their footing. 

Opt for a digital marketing strategy

Traditional marketing cannot forecast trends as fast as digital marketing. Digital marketing not only allows you to reach more customers outside your local radius, but ecommerce software and tools give you an edge in determining how to best meet your customers’ needs. 

“The solution is to approach marketing holistically, in terms of its coordination with finance, operations, logistics, customer service, and internal and external communication, all working toward the same business and brand goals.” 

-Ana Andjelic, strategy executive

Here are a few excellent digital marketing avenues to consider for your business: 

Email marketing: 64% of small businesses rely on email marketing to reach their customers. Use email to inform new and existing customers of new product launches, sales, discounts, and more. It’s also a great way to build a relationship with your customers. 

Video marketing: According to Wyzowl, about 87% of marketers believe video gives them a positive return on investment (ROI). And these days, there are countless video marketing tools such as Vimotia and Videowise that make this channel both effective and affordable. 

Social media marketing: Being consistently active on social media really does pay off. In fact, 57% of consumers follow brands to stay up-to-date on new products and services, and so much more. 

Why you need to understand your revenue and expenses

Every business starts with the goal of making a profit and staying in business for the long haul. Being strategic with your marketing and business operations increases your revenue and reduces business expenses, which keeps you in business!  

Understanding the health of your business starts with knowing your numbers—even if it isn’t one of the most exciting parts of running a business. 

Get your finances in order from the start with Shopify Balance

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