One of the scariest parts of launching a business is figuring out if it’s profitable or not. This becomes even more challenging with a side business.
When you work on a business part time, you don’t have the luxury of taking several days to make key decisions and you need to avoid situations that might negatively affect your full-time job. Because of this, you need simple ways to measure how your side business is doing.
How can you tell if your side business is a success? More importantly, how will you know if you’re ready to take your side business full time?
The following guide will show you the exact information you need to calculate your profit and results, which you can use to figure out the next step for your small business. Let’s get started.
Collect Your Essential Side Business Metrics
No matter how small your business is, there are a lot of metrics you can use to track success. However, since running a side business requires efficiency and focus, we’re only going to worry about the essentials.
Also, because time is a very scarce resource for a part-time entrepreneur, you’ll need to factor it into your computations as well.
For simplicity, the figures below are listed per month. But you can use any duration that is suitable for your side business. For example, if you’re trying to measure how effective your limited launch is, you can use your launch as your time frame. Or, you can compute per week if you want to keep a closer eye on how business is going.
Free PDF Worksheet Download
To make your data gathering and computations easier, you can use the free Side Business Profit Results - Worksheet.
1. Important Side Business Sales Figures
Since the priority of a new side business is to get to profitability as soon as possible, the first thing you should focus on is sales. You’ll need to gather the following numbers:
- Number of Units Sold - These are just the number of items you’ve sold. If you’re selling services, note the number of individual services or packages you sold.
- Gross Sales Revenue - This is all the income you received as a result of your sales. Just add up all your incoming sales transactions for the month.
- Average Gross Revenue Per Sale - How much is each item or service sold for? Take your Gross Sales Revenue and divide it by the Number of Units Sold. This will give you a rough idea about how much your income is per item sold.
- Cost/Expense of Each Sale - Consider also how much you spend for each sale you make. Include the base cost of each item, shipping costs, and other expenses.
- Average Profit Per Sale - Take your Average Gross Revenue Per Sale and deduct the Cost/Expense of Each Sale from that. You’ll have an idea how much money you’re making for each item you sell.
- Time Spent on Each Sale - As a side business owner, it’s important to note the amount of time you spend on each sale. This includes the time you spend creating the products, marketing, talking to potential customers, and sending the products off for shipping. If it’s possible, try to accurately log your time by writing it on paper or using apps like RescueTime or Toggl.
If you want to learn more advanced methods for calculating profits, expenses, and sales, here are some helpful guides to review:
- PlanningFrom Idea to Break-Even: How to Create a Financial Model for Your BusinessAndrew Blackman
- Microsoft ExcelExcel What-If Analysis: How to Use the Scenario ManagerBob Flisser
- FinanceHow to Measure Your Business's ProfitabilityAndrew Blackman
2. Tracking Leads for Your Side Business
Apart from your sales figures, it’s also important to measure the leads you reach. These are the potential customers that have expressed interest in buying from you, whether by contacting you directly, signing up for your mailing list, or following your business on social media. Here’s what you need to know about your leads:
Number of Leads Per Month - Start off by counting the amount of new leads you’ve reached this month. These could include new subscribers to your mailing list, incoming phone calls asking about your products, and new social media followers. Anybody who has shown any interest in your product, especially if you have a way to reach them, is considered a lead.
Number of Converted Leads - These are the number of leads that eventually became sales. Knowing this number will give you an idea about how your sales funnel looks like and which part you’ll need to tweak if you want more sales.
- Average Cost of Each Lead - A simple way to measure this is to add up all that you spent on marketing and advertising, then divide it with the number of leads you gathered. This will give you an idea about how much you need to spend to get each new lead next month. If you compare it with the amount of profits you get for each sale, this number should be much lower. Comparing these two numbers will help you decide if you’re spending too much on your current marketing plan.
- Time Spent on Each Lead - It’s also worth it to look at the time you spend on your leads, whether it’s responding to their questions, posting on social media, or following up on their orders or payment. Is the time you spend nurturing these leads worth it, given how many of them convert into actual sales? Are there some lead channels—such as email, calls, or social media—that convert better than others? Since your time as a side business owner is limited, reinvest that time in the things that work best.
3. Overall Business Metrics
Once you’ve specifically analyzed your sales and leads, let these numbers come together and start looking at the big picture. Here’s what you need to gather and compute for:
- Total Business Expenses - This is the cost of the business as a whole. List all your expenses for product creation, marketing, advertising, packaging, and shipping. If you provide services, add the tools and utilities you use to keep your side business running. If you had some business tasks or errands outside your home, include transportation fees such as your fare or gasoline expenses. You may also include any fees paid to service providers that have helped you out, including lawyers, accountants, or consultants.
- Net Profit - Subtract your Total Business Expenses from your Gross Sales Revenue from the first section. This will let you know whether you’ve made money from your business, or if it all went to expenses. The higher your Net Profit, the better the sign that you should continue or scale your side business.
- Time Spent on Business - How much time did you spend on your side business for the month? Unlike your earlier estimates, this includes all business tasks, not just those related to making sales and cultivating leads.
- Free Time - How much free time do you have per week or per month, now that you have a side business? Does this number seem sustainable for you or do you think you’ll burn out? It’s best to overestimate the breaks you need in between working on your side business and your day job so that you don’t run out of steam. If you think you’ll be overworking, see if there are areas where you can cutback or if there are ways to improve the quality of your breaks if you can’t do much about the quantity.
It will also be useful for the next stage of your business if you identify the following things:
- Most Profitable Product - Among your products, which brings in the most net profits? This is the product that brings in more money than your other products when both the product’s price and costs are taken into account. Are there ways for you to sell more of this product next month?
- Most Time-Consuming Task - Running a side business means that you need to be extra careful about where you spend your time. Identify the business tasks that consume the most of your time and assess if the hours you spend are worth it. If not, see if there’s a way you can manage your time better and redirect some of your work hours to tasks with higher returns.
- Biggest Expense - What’s the largest expenses for your side business? Are these expenses justifiable because they bring in good returns? Is there a way for you to bring the expenses down without sacrificing your profit? For example, if you spend a lot on packaging material, but can get a big discount if you buy in larger quantities, it might make sense to take advantage of the discount if you plan to scale up your business.
Once you’ve identified the above items, you can make a decision to quit, continue, or scale your side business. If you decide to continue or scale, you’ll know exactly which parts of the business need to change if you want to keep it sustainable.
Ensure a Profitable Side Business
It’s easy to see if your side business is profitable financially, but there are other things you need to consider as a side business owner. You need to review your time, your personal capacity to do work, and how much you’re willing to change in your life to make your side business work. Consider the following questions:
- Did You Meet Your Targets? If you launched your side business with specific sales or income goals in mind, were you able to reach them? If you have, this is a good sign to keep going. If not, is there a large gap between your goals and what you actually achieved? Small differences might mean that you just have to make some changes to your execution, so don’t worry if you narrowly missed your goals. If you missed your goals by a lot, are there clear areas where you could make improvements? If there are, consider trying again. If not, perhaps it’s time to move on to another idea.
- Which Areas Need Improvement, and How Can You Improve Them? For example, do many of your leads slip away and never convert into sales? If this is the case, revisit your communication with the leads that didn’t pan out, if any. See if you can determine why these didn’t convert into sales. Did they stop corresponding with you once they found out the price? Or were these urgent orders that needed a faster shipping time? By going back to your unconverted leads, you’ll be able to make some changes that can help you make more sales in the future.
- What Are Your Goals for Your Next Review? Given all the figures you’ve gathered and computed, it’s time to set some goals. What numbers do you need to reach to make before you’re comfortable with scaling the idea up? This might mean making more sales, getting more leads, or reaching a certain amount of profit. If you’re tempted to take your side business idea full time in the near future, list the target sales and profits that will make you feel secure with making that transition.
After reviewing your answers to the above question, decide what your next step should be. Will you keep going with your side business? If you do decide to continue, review the above numbers again in one month. The regular review can help you make better decisions as your side business grows.
If, after this review, you decide to drop your side business idea, don’t be disheartened. For successful entrepreneurs, their first few business ideas are often pivoted or abandoned. Fortunately, they learn quickly from these dropped ideas. List what you’ve learned from the process and what you can do to make your next idea better. Through this process of testing and review, you’ll eventually strike gold.