Money Matters: How to Measure and Understand Profit Margins
Make financial planning part of the equation when it comes to running your children’s activity business. Don’t be intimidated! We’re here to break down the basics and help you get the most out of creating a business plan, budget, and revenue goals.
Sales or Revenue: The difference between the two terms
Revenue is the total money collected for both operating (sales) and non-operating sources. Some businesses have sources of non-operating revenue such as interest, royalties, donations, and space rental fees.
Sales, also known as Operating or Sales Revenue, are funds collected in exchange of goods or services. Your sales include amounts collected for your camps, memberships, parties, and class activities. Sales are typically the primary source of a business’ revenue, but the two terms aren’t mutually exclusive.
The difference between revenue and sales matters because you need to factor in all sources of revenue to understand the total money that your business collects. This means if you rent your space, sell and license any of your programs, collect royalties, or accept donations, you’ll need to add these to your sales to get your total business revenue.
Sales + Additional Revenue Sources = Total Business Revenue
Of course you already know that your business has expenses! But did you know that children’s activity businesses have two ways to classify expenses? They are:
Fixed expenses: expenses that stay the same.
These include rent, insurance, equipment leases, loan payments, and salaried staff. No matter what programming you run or how many sales you get, fixed expenses do not fluctuate. These are the easier ones to track because they are more predictable.
Variable expenses: expenses that change depending on volume or use.
These include part-time hourly payroll, classroom materials (paint, glue, books), event and party supplies (paper goods, balloons, helium), and general office supplies (paper, pens, ink). These can be trickier to track because they often fluctuate.
When creating a budget for your business, you’ll want to start by listing the total amount of your fixed expenses. This determines a basis point for setting revenue goals.
For example, if your:
Rent is $7,000/month
Small business loan is $2,500/month
One salaried person at $2,500/month
Then your total fixed expenses = $12,000. That’s the amount of revenue you would need to cover your fixed expenses.
Next, you’ll want to itemize the monthly variable expenses that your business could have. If you run a curriculum that requires ongoing supply purchases, like STEM and art programs, or plan to run a large number of parties and events, your variable expenses will fluctuate based on how often you need to replenish supplies (such as craft materials, balloons, and paper goods.) Typically, you’ll see this expense spike at the start of a new semester or session of classes.
More equipment based programs, such as dance studios or gymnastics, may only need to pay for equipment when they first open and won’t need to order again until a replacement is needed. In this case, their variable expenses would be lower but fixed expense for equipment would be higher.
In order to not lose money when running your business, your lowest possible revenue goal has to equal your total expenses (fixed + variable). But people don’t typically open a business to not lose money. Your business goal should include making money, even after expenses are deducted from the total revenue.
Profit & Margin
Money matters to any business. If you handle finances, you probably have an understanding of profit. Profit is defined as the amount of money a business makes after expenses. The percentage of money remaining out of the total revenue collected is called the profit margin.
In order to grow your business and generate a profit, you’ll need to understand what drives the margin higher or lower.
Stay tuned for part 2 where we’ll walk you through how to determine profit margins for your business and provide you with key metrics to see how you're trending.