How do I know if my business is actually making money?

Why doesn't a busy business always mean a profitable one?

A busy business can still lose money, because a full calendar shows that people want what you sell, not that your prices cover what the work costs. A business can also be booked solid and still lose money on every job if the materials, the hours, and the overhead add up to more than the invoice.

The bank balance is the easiest number to check, and it's a poor guide to profit in both directions. A big deposit from one client can make a slow month look fine, and a month of strong sales can look terrible if the customers haven't paid yet. The balance mixes this month's work with last month's invoices, loan payments, tax bills, and whatever you took out to live on.

Finding out whether a small business is making money takes about an hour the first time and 30 minutes a month after that. The check in this guide is written for owners of 1- to 10-person businesses, costs nothing, and needs only your bank and card statements and a spreadsheet or a sheet of paper (though you can connect your accounting software if you want something more automatic).

What numbers tell you if your business is making money?

Three numbers together tell you whether a business is making money: profit, cash flow, and what you pay yourself. Each one catches a problem the other two miss, such as a profit on paper with no cash to pay rent, or a healthy bank balance built on the owner working for free.

1. 1
   Profit

   What the business earned in a month minus what it cost to run that month. Profit tells you whether your prices and costs work.
2. 2
   Cash flow

   The money that actually came into and went out of your accounts that month. Cash flow tells you whether you can pay the bills that are due.
3. 3
   Owner pay

   What you take out for yourself, compared with what your time is worth. Owner pay tells you whether the profit is real or only your unpaid labor.

A business that is making money has all three in good shape: a profit after paying the owner a fair wage, cash that grows or holds steady over a few months, and enough in the bank to cover the next month's bills.

Why can a profitable business still run out of cash?

Profit counts money when it is earned or spent, and cash counts it when it actually moves. As QuickBooks explains, you earn revenue when you make a sale, but only receive the cash when the customer pays. The timing difference between earning and receiving is why a profitable business can have an empty bank account, and why a business with plenty of cash can be losing money.

Whether unpaid invoices count as profit depends on your accounting method. The U.S. Small Business Administration describes the difference: the accrual method records a sale as soon as it is completed, and the cash method records it only once payment arrives. A P&L on the cash method sits closer to the bank balance but leaves out money customers still owe you.

Wave's guide to profitability names four common reasons a profitable business runs short of cash: unpaid invoices, the principal part of loan payments, owner draws, and tax money that wasn't set aside. If your P&L shows a profit and your bank balance doesn't, check those four first.

How can I check if my business is profitable this week?

You can check whether your business is profitable in about an hour by working through your last three months of bank and card statements in the five steps below. One month on its own can mislead you because of a big job or a once-a-year bill, and three months evens those out.

1. 1
   Separate business and personal money

   Mark every personal purchase on the statements so it doesn't count as a business cost. The IRS says keeping separate business and personal accounts makes records easier to keep, and if you pay personal bills from the business account, that money still counts as business income. If everything runs through one account today, open a business account this week so next month is cleaner.
2. 2
   Gather the last three months

   Download statements for every business bank account, business credit card, and payment app or card processor you use. Add any invoices sent but not yet paid, and any bills you owe but haven't paid.
3. 3
   Total the money in and the money out for each month

   Leave out anything that isn't income or an expense: transfers between your own accounts, credit card payments (count the purchases on the card instead), loan money received, and money you put in yourself. Count card processor payouts once, not again as separate sales.
4. 4
   Take out your draws, then subtract a fair wage

   Remove what you paid yourself from the expenses, because owner draws aren't a business cost. Then subtract what it would cost to hire someone to do the hours you work. The result is profit after paying the owner, which is the number that shows whether the business is making money.
5. 5
   Compare against a simple target

   A business that is making money shows a positive profit after a fair owner wage in most months, and a cash balance that isn't shrinking over the three months. If either one fails, the warning signs section of this guide shows where to look.

What does a simple profit and loss statement look like?

A profit and loss statement, or P&L, lists a month's income at the top, the costs underneath, and what's left at the bottom. The example below uses a made-up five-person cleaning company with round numbers, so you can follow the math line by line.

The cleaning company in the example is making money: $5,000 after a fair wage for the owner. The $11,000 line before owner pay is easy to mistake for profit, and it overstates the business by the value of the owner's time.

The same month, seen as cash

The example cleaning company's bank account looks worse for the same month. Customers still owe $8,000 of the $40,000 invoiced, the company paid $1,200 of loan principal, and the owner took the $6,000 wage as a draw.

The example company made a $5,000 profit and its bank balance fell by $4,200. The $9,200 difference is the $8,000 still owed by customers plus the $1,200 of loan principal. Neither number is wrong. The P&L says the prices and costs work, and the cash view says collecting the $8,000 matters more this month than finding new work.

Which of my services or products actually make money?

Gross margin by service shows which work pays for the business and which work only keeps you busy. FreeAgent defines gross profit as income minus the costs that relate directly to making particular sales. Divide gross profit by sales for each service or product line and compare the percentages.

1. 1
   Recurring office cleaning: 50% gross margin

   $28,000 sales − $14,000 direct costs = $14,000 gross profit. $14,000 ÷ $28,000 = 50% gross margin.
2. 2
   One-off deep cleans: 33% gross margin

   $12,000 sales − $8,000 direct costs = $4,000 gross profit. $4,000 ÷ $12,000 = 33% gross margin.
3. 3
   The whole business: 45% gross margin

   $40,000 sales − $22,000 direct costs = $18,000 gross profit. $18,000 ÷ $40,000 = 45% gross margin.

In the example cleaning company, one-off deep cleans bring in 30% of sales ($12,000 ÷ $40,000) but only 22% of gross profit ($4,000 ÷ $18,000). The owner has three choices: raise the price of deep cleans, cut the hours or supplies each one takes, or sell more recurring contracts instead. A low-margin service can still be worth keeping, as long as you keep it on purpose.

For a product business, calculate gross margin per product or category. Count only the cost of the items you actually sold that month, not everything you bought, or a big stock order will make one month look like a loss.

How much should I pay myself from my business?

Pay yourself a set amount on a set schedule that the business can cover from profit, not whatever is left in the account at the end of the month. A fixed amount makes your personal budget predictable and makes it obvious when the business can't afford you.

How you're paid depends on how the business is set up. IRS Publication 334 says a sole proprietor can't deduct their own salary or personal withdrawals, because the owner isn't an employee of the business, and those withdrawals are tracked in a separate drawing account. An S corporation is different: the IRS says it must pay a shareholder who works in the business reasonable compensation through payroll before taking other distributions.

• Start with your fair wage from the first check, and compare it with the profit before owner pay in your last three months.
• If the profit before owner pay covers the fair wage, set your regular pay at or below that wage and leave the rest in the business as a cushion.
• If the profit doesn't cover it, pay yourself a smaller fixed amount, and treat the gap as the number your prices or costs need to close.
• Ask your accountant how much to set aside for income and self-employment tax, and move that amount to a separate savings account each time you pay yourself.

What should a monthly money review include?

A monthly money review takes about 30 minutes on the first business day of the month and covers the month that just ended. QuickBooks recommends running a cash flow statement every week or month so problems show up before they become urgent. Monthly suits most small businesses, with a weekly look at cash when money is tight.

1. 1
   Pull last month's transactions

   Export from your accounting tool, or download bank, card, and payment app statements. Match transfers and processor payouts so nothing is counted twice.
2. 2
   Sort into the same few categories every month

   Five to eight categories is plenty, such as sales, direct costs, staff, rent, software, marketing, and owner pay. Keeping the categories fixed is what makes one month comparable with the next.
3. 3
   Write down three numbers

   Money in, money out, and what's left, plus the change from the month before.
4. 4
   Look 30 days ahead

   List the income you expect and the bills you know are coming. Flag any week where cash would drop below your minimum level. QuickBooks suggests a reserve of 3 to 6 months of operating expenses as a buffer for slow periods; pick a starting floor you can reach and build toward it.
5. 5
   Pick three things to look at

   A cost that jumped, a client who hasn't paid, a service whose margin slipped. Three is enough to act on before the next review.

What are the warning signs that a business is losing money?

The clearest warning sign is profit after a fair owner wage that stays below zero for three months in a row. The signs in the table below usually show up earlier, and each one points to a specific fix.

Wave's profitability guide lists rising sales with flat profit, expenses outpacing income, and owners underpaying themselves as signs that revenue is hiding a profit problem. One-off costs are the exception: a big annual insurance bill or a new piece of equipment can make a single month look like a loss without anything being wrong.

When should I get a bookkeeper or an accountant?

Bring in a bookkeeper when the monthly review takes you more than an hour or you keep putting it off, and an accountant before you make tax decisions. The SBA suggests a CPA, a bookkeeper, or an online service, and notes that a bookkeeper can handle the day-to-day work at a lower cost.

• A bookkeeper records and categorizes transactions, reconciles accounts, and produces the monthly P&L. A bookkeeper is the right first hire when the problem is time.
• An accountant or CPA handles tax returns, estimated taxes, how the business is set up (sole proprietor, LLC, S corporation), and how you pay yourself. An accountant is the right call when the problem is a decision.
• For a 1 to 10 person business, a bookkeeper every month and an accountant a few times a year is a workable setup.