Key Financial Metrics for Solopreneurs
You need to understand more than your bank balance.
For a lot of solopreneurs, money is the part of the business they avoid. You can figure out sales and marketing. But terms like "profit and loss" or "net income" sound like something an accountant should handle.
But on the contrary, author Mike Michalowicz writes in the book Profit First:
There is only one way to fix your financials: by facing your financials. You can’t ignore them. You can’t let someone else take care of them. You need to take charge of the numbers.
“Taking charge of the numbers” doesn’t have to mean “understanding complex tax and accounting concepts.” Definitely leave that for the professionals. But a handful of numbers will tell you more about the health of your business than simply checking your bank balance.
Table of Contents
Why your bank balance isn't enough
Your bank account tells you one thing: how much money you have right now. It doesn't show trends and doesn’t go deep enough into your income versus your spending. You can’t tell by the bank balance alone if there’s a problem.
Most of my career was spent in banking and fintech. As part of an executive team, we reviewed the company's financial performance against the budget every month. The company was small enough that if there was a problem, we made adjustments. No red tape to work through.
Solopreneurs benefit from the same flexibility — if you can recognize a problem when it comes up. Founder Reports found that 68% of solopreneurs have less than six months of emergency savings, and 48% have gone at least one month without income.
"I have money in the bank" and "my business is financially healthy" are two different statements.
3 financial metrics you should keep track of in your solo business
These metrics tell you most of what you need to know about how your business is doing. They’re easy to calculate if you’re tracking your income and expenses, either in a financial management tool or on a spreadsheet.
1. Net income (or net profit)
Net income is your business revenue minus your business expenses. It's the money you keep.
In the U.S., this is used to calculate your taxes. There’s solopreneur advice floating around that tells you to set aside 30% of every dollar that comes in. That’s not correct. You set aside money for taxes after you deduct your expenses. If you earn $5,000 in one month and have $500 in business expenses, you’ll be taxed on $4,500, not $5,000. You set aside money based on $4,500.
U.S. tax law also requires self-employed people to pay quarterly taxes on their earnings (called net profit on the tax forms). Calculate what you owe based on your net income, make your payments, and tax time won’t be painful.
Tip: After setting aside money for taxes, the rest is how solopreneurs typically “pay themselves.” You take your $4,500 of net income, set aside what you’ll owe for taxes, and the rest is yours.
2. Profit margin
Profit margin is your net income divided by your revenue, written as a percentage. It tells you how much of your income you keep.
Say your annual revenue is $60,000 and your net income is $45,000. Your profit margin is 75%, so you’re spending 25% of your earnings on business expenses.
The margin lets you compare how you’re doing from month to month. Some of your expenses might fluctuate based on your earnings, like anything tied directly to how many clients you have.
If you earn $7,000 one month and $5,000 the next month, but your profit margin is the same, you’re basically “holding steady.” However, if you have a lot of fixed expenses, your profit margin will go down in a lower-earning month.
Service-based solopreneurs often have profit margins around 70-80% because their costs are low. Mine is closer to 90%. If you feel like your profit margin isn’t high enough, take a look at your expenses and see what you can cut.
3. Effective hourly rate
Your effective hourly rate is your total income divided by every hour you work, including the non-billable hours. Admin, marketing, and time spent on the “behind-the-scenes” work are all included in the total hours you spend on your business.
If you earn $2,000 in a single week and spend 40 hours working, your effective rate is $50/hour — even if you only spend 30 hours on actual client work.
Your effective hourly rate tells you whether your pricing is working. Earning $5,000 a month on 25-hour weeks very different than earning $5,000 a month on 60-hour weeks.
If your effective hourly rate is too low, you should consider raising your rates or automating work so you spend less time on manual tasks.
Anna Burgess Yang
Another thing to manage: cash flow
Cash flow is a bit different than other financial metrics because it’s not a single number. It’s the inflows and outflows of your business. The other numbers are usually measured point-in-time, but cash flow is near-constant.
Cash flow is about whether you have money in your bank account when you need to pay a bill. People typically refer to either “positive cash flow” (you have the money) or “negative cash flow” (you fall short).
Tracking cash flow monthly
Cash flow is about timing — what you collect versus when you have to make payments. Solopreneurs struggle with this because clients may owe them money, but they haven’t been paid yet. You can have a healthy amount of revenue, but still struggle with cash flow.
Let’s say a client owes you $1,500 and it’s due on the 15th. But you need to pay your $500 credit card on the 10th, and you only have $300 right now. That’s a cash flow problem. At the end of the month, it looks fine on paper, but day-to-day you’re stressed.
I track my cash flow in a spreadsheet. I enter my bank balance at the beginning of the month, and my expected inflows (client payments) and outflows (expenses) — on the specific day I expect them to occur, with a running balance. I can see, at a glance, if I’m going to have a cash flow issue.
Accounts receivable timing
Accounts receivable is the money clients owe you. How long it takes clients to pay directly impacts your cash flow. Net 30 or Net 45 terms are common, which means clients have 30 or 45 days to pay from the date of the invoice. Most of my clients pay on the due date, not sooner.
One late invoice can cause cash flow issues. If you were counting on that payment to arrive on a specific date, you might not have enough to cover your own expenses — whether it’s business or personal.
I invoice clients on the same two days every month (the 5th and the 20th). That way, I can reasonably expect payments to arrive on the same days, such as the 5th of the following month for Net 30 payments. It's easier to manage cash flow if you “get paid” on a schedule.
Creating an emergency fund
An emergency fund can help you better manage cash flow. If you have a month where you’ve earned more than you need, put the extra in savings. That way, if you have a low-earning month or a client who pays late, you don’t need to panic. You just pull money from savings instead.
Businesses often look at their runway: how much cash they have in the bank to cover expenses if they have no revenue. Runway is usually expressed in months, i.e., “you have five months of runway.”
Your emergency fund is your runway. If you have any savings, divide it by your monthly fixed expenses, and you have the number.
Last year, I had brain surgery and had to step away from my business for several months. Money kept going out because I had to keep paying for things like my accounting firm, even while I wasn’t working. My business savings account was able to handle all of the cash outflows while I had no inflows.
How to start a financial tracking habit
If your finances are a mess right now, don't try to reconstruct three years of records. Clean up the most recent month of business income and expenses so that you can calculate these three metrics: net income, profit margin, and effective hourly rate.
Over time, you should work on cleaning up the current year so that you have accurate records for your taxes. Then build a habit of setting aside some time every month to check in with your finances. Half an hour each month is enough to look at your numbers and spot trends.
Eventually, the numbers get complicated enough that you may want help. But even if you outsource bookkeeping, never lose sight of your financial metrics. The worst thing you can do is ignore the information your accountant provides. They’re not in charge of making financial decisions — you are.
How to keep track of where your money goes
Knowing what comes in is only half of it. Here's how to stay on top of where it goes.
- Open a separate savings account for taxes. Move money into it at the end of each month so you have enough saved by the time taxes are due.
- Track expenses year-round. You can’t claim business deductions if you don’t know what you spent, and year-round tracking is easier than a once-a-year scramble.
- Run everything through a business bank account and card. Keeping track of finances is much easier when personal spending isn't mixed in.
- Use a financial tool. QuickBooks, Xero, Wave, or even a spreadsheet will work.
- Ask your accountant when something doesn't make sense. That's what you're paying them for!
FAQs
How often should I review my business finances?
Do a monthly 30-minute check on your cash flow and outstanding invoices. You can also do a quarterly, deeper review of profitability and expenses. Those two are enough for most solo businesses.
What financial metrics should a solopreneur track first?
Start with net income (revenue minus expenses) and your monthly cash flow. These two tell you whether your business is profitable and whether you have enough money coming in to cover your costs. Add profit margin and effective hourly rate once you have a baseline.
Do I need accounting software to track financial metrics?
Not necessarily. A spreadsheet works for a straightforward business. But financial management tools like QuickBooks or Wave categorize expenses automatically and generate the reports that make financial management easier.
