If you’re anything like me, you prefer to ignore the number side of your business and just hope for the best.
But if you’re also like me and want nothing more than to build a successful business, you can’t ignore your numbers.
There’s much more to building a financially sound business than what’s outlined in this article (e.g. you can’t ignore your taxes).
However, these are 5 simple calculations you should be doing at the end of each month to ensure your business is growing, to set new goals, and to find areas of improvement.
Chances are, you already tally your sales for the month. But are you tallying your expenses and wages so you can calculate profits?
I spent the first few years running my handmade business without looking at my profits.
I would buy fabric and notions, determine how many handbags I could make with my materials, and price my products to cover those costs.
When selling at a craft show, I would tally my sales, compare them to the craft show fee, and if I had money left over, I’d deem that event a success.
Years went by before I realized I had been losing money.
I wasn’t considering the hours I put into my business, or other expenses that needed to be covered by my business (e.g. website fees, packaging expenses, event travel and parking expenses, etc.).
When you take the time to subtract your expenses and wages from your revenue at the end of each month, you’re forced to see how much money is leftover.
If you realize the money leftover is much less than you anticipated, you can find ways to reduce your costs.
You should be adding cost-saving tasks to every month’s to-do list. Such as:
- finding a cheaper supplier for materials
- getting rid of unneeded expenses (e.g. memberships you’re not making use of or listing items in your Etsy shop that aren’t necessary)
- avoiding tasks that don’t give you a return on investment
This step will ensure you’re constantly building a more profitable business.
More profits mean you have more money to invest back into your business to grow it, can pay yourself more money, or have money to help float your business through slow times.
2) Conversion Rates
A conversion rate is calculated by taking the conversions (i.e. an action you want a consumer to take, such as buying) and diving that number by the total number of people who did and didn’t take the desire action. Multiply that number by 100 to get the percentage.
For example, if you’re tracking sales conversions or your website, you would take the total number of people who purchased that month, divided by the total number of people who visited your website that month. Turn that number into a percentage by multiply it by 100.
If 100 people visited your website and 2 of those people purchased, you have a 2% conversion rate.
A conversion rate will tell you how successful different aspects of your business are.
You can compare a conversion rate to general averages (e.g. the average e-commerce conversion rate is around 1% – 4%, the average email newsletter open rate is around 20%) to determine if you’re on average, below, or above.
But you can also use conversion rates to:
- find holes in your business (i.e. where you’re losing customers) – are people ignoring your social media posts? Then your content needs improvement. If many people click on a social media post to visit your website, but once there, they immediately leave, your social media content is great, but your website needs work. If they get all the way to your checkout page, but abandon the cart, something in the checkout phase needs tweaking.
- find best practices – if you measure the conversion rate of a Facebook post and find it’s higher than your average, you can try to mimic that Facebook post more in the future to increase your average click-through rate of a Facebook post, and send more traffic to your online shop.
- set and track goals – if your Etsy shop’s conversion rate is 1.5%, you may set a goal to raise it to 2% next month.
Conversion rates aren’t just reserved for sales (e.g. how many people who visit your online shop buy). You can calculate the conversion rates (CR) of almost anything.
- Facebook posts – of the hundreds of people who viewed your post, how many commented or liked? (CR #1) How many clicked your link? (CR #2)
- Craft Shows – a little harder to track but if you have a tally counter it helps. Of the number of people who attended the event (the organizer should have this number), how many stopped at your table? (CR #1) Of the people who stopped at your table, how many purchased? (CR #2) How many signed up for your newsletter? (CR #3)
- Online shop traffic – of the people who visit your website, how many come from Facebook vs. Pinterest vs. Google/organic? (CR #1) How many of your website visitors buy? (CR #2) How many visitors visit more than one page? (CR #3) How many people who get to a checkout page actually buy? (CR #4)
You see? There are many ways to track conversion rates and find areas of improvement.
Take the time to look at the conversion rates in different areas of your business, compare them to last month’s conversion rates, and set goals to improve next month’s conversion rates.
Make note of when you had a post, listing, week, craft show, etc. that produced higher than average conversion rates, analyze what caused those better results, and plan to replicate them next month.
3) Return on Investment
To calculate the return on investment, divide the net income from an investment, by the total cost of the investment. Multiply that number by 100 to get a percentage.
For example, if you sell at a craft fair that costs you $200 and you make $500 in sales, your net income is $300. 300 divided by 200 = 1.5 x 100 = 150%.
You can use this number to compare to the return on investment of other craft fairs and other marketing and sales channels to determine if that craft fair, or craft fairs in general, are worth your time and money. If you get a much higher return on investment from Etsy, you may choose to dedicate less time to craft fairs and more time to Etsy or selling online.
It’s often easier to spot the things that were a waste when it comes to the money we spent on it.
But many small business owners miss the tasks they’re wasting time on.
Many creatives don’t value their time; they don’t track how many hours they put into their business, let alone a specific tasks.
You can imagine a likely scenario of someone opening Facebook each day, creating a post, and then getting distracted, scrolling, liking, commenting, following links, etc.
Let’s say this eats up an hour of time each day, which equates to about 20 hours/month.
They want to pay themselves $15/hour, so their Facebook investment in a month is $300.
Through Google Analytics, they’re able to see that only 1 person who visited their site from Facebook purchased. If they made a purchase for $50, they don’t even need to calculate their ROI to determine they’re not getting paid for the time invested into Facebook.
If they don’t have Google Analytics, they can gather information such as how many people click on their posts and multiply that by the average sale conversion rate of their website, to give them a rough idea of how many sales Facebook might be driving.
If this was your business, would you continue spending 20 hours/month and $300 in wages each month on something that produces low sales? Definitely not.
Look at the ROI of:
- Craft shows
- Social media marketing
Anything you spend time and money on, calculate the ROI to determine if you’re at least making your money back, but ideally, making your money back and then some.
Compare the ROI of different tasks and investments and use that information to determine which should get more of your time/money moving forward, and which should get less.
4) Units per Transaction
Your units per transaction tells you how many items/units customers buy in one transaction.
Increasing your units per transaction is an easy way to boost your revenue.
It’s easier to build on the momentum you have with a shopper who’s ready to buy than it is to convince more people to buy. When a shopper has fallen in love with a product and has their wallet out, they feel more comfortable spending a little more and adding something to their purchase.
This is why Starbucks often asks if you’d like to add a cookie to your coffee order. And why McDonald’s asks if you’d like to add fries to your order. And why hairdressers ask if you need any hair products after a haircut.
You’re already there and ready to purchase, it’s easy to spend a little more.
You can find your average units per transaction by dividing the total number of units you’ve sold by the number of transactions made in the same time period.
For example, if I sold 200 items at a craft show and had 100 transactions, my units per transaction would be 2. On average, each customer buys two items.
You should constantly be trying to improve your average and to find ways to encourage more shoppers to buy more than one item.
>> Here are ways to easily increase your units per transaction: 5 Strategies to Increase Units Per Transaction
5) Return Customers
Repeat customers not only increase your business’s revenue, they also improve its profits.
You’ll spend less time and money convincing an existing customer to buy than you will on someone who’s never heard of your business. Since you spend less on marketing when it comes to a repeat customer, your profits are higher.
You should have a way to track how many customers are repeat customers and implement best practices to keep more people coming back (here are 10 ways to retain customers, as well as 6 ways to avoid losing them).
The more people you get to return, and the more times they return, the more loyal they’ll become to your brand. Loyal repeat customers are the bread and butter of a business.
Just think of how many businesses you’re loyal to. You may visit the same clothing store whenever you need a new outfit, or the same grocery store each week, or the same hairdressers, etc.
When a business keeps you happy and makes it easy for you to return, you give them your business every opportunity you can.
Make a habit of tracking these 5 metrics and work on improving them each month. You can also follow these 3 essential steps for planning your next month: 3 Steps for the Start of Each Month (for small business success).
And consider adding these best practices that are commonly ignored: 6 Small Business Best Practices that are Commonly Ignored
Hey, I’m Erin 🙂 I write about small business and craft show techniques I’ve learned from being a small business owner for almost 2 decades, selling at dozens of craft shows, and earning a diploma in Visual Communication Design. I hope you find my advice helpful!