It’s the end of the year, and you know what that means…end of year reporting! Now’s the time of the year to dig out the Excel sheets, budgets, expense reports and bank statements and start reconciling. A pain, yes…but incredibly valuable.
Freelancers and independent workers often skip this critical exercise. Moving from the end of one year to the next is approached with a somewhat oozing type of existence, only slightly punctuated by a couple weeks of either reduced or insane workloads (industry dependent, for sure).
One of the best things you can do for your business – whether you’re a solo shop or a multi-national concern, is to stop at the end of the year and take a look at how things went. For freelancers and independents, you should be looking at the following metrics:
- Total Annual Revenue - how much money did you make? This is gross, before taxes, payroll, etc.
- Year over year growth - how much did you grow from last year (as a percentage?) This is a great indicator of overall long-term health of your venture. To calculate this, use this equation: [(This Year - Last Year)/Last Year]*100. 100% growth means you doubled your business from last year, 50% means 1.5 times, and so on.
- Average Project Size - how much did you make per project? This may need to be separated into different lines of business, to account for profitability differences among your offerings. Use this to help you understand what your average sale is, and work to improve it next year. (Hint: use this to help establish a minimum project size for next year – the dollar amount which you won’t go under for a project, which helps you raise your margins).
- Revenue Per Client - this is a great metric that helps you understand the value of various clients, to establish where to spend your energy marketing in the next year – and to know which clients to show the door to. Check this metric against average project size. Those clients that are consistently below average may need to be upsold, transferred to a different line in the business, or sent packing altogether.
- Profit and Loss Statement - This isn’t really a metric, but a complete tool full of all kinds of great data. Compile a full P&L for the year, month-by-month. A profit and loss statement shows you, monthly, how much is coming in and how much is going out. Use this to apply percentages to expenses and to look for outliers where you may be spending too much money. This is a great tool to use in establishing budget priorities for the coming year.
- Revenue by Month - using your P&L, you can look at revenue on a month-by-month basis. Chart this on a line graph and look for the trends. Most industries will have periods of the year that are slower than others – for me, it’s July – September. Looking at these trendlines will help you plan cashflow next year to be more consistent in these down times.
- Average Revenue per Month - taking an average of your revenue per month over a year gives you an idea of where you’re generally running, sales-wise. Knowing that you make, on average, $6000 a month, helps you to understand when you’re having a good or bad month, and gives you a meaningful way to set sales goals. I use this to set initial sales goals for the first quarter of the year, increasing them throughout the year to get to my annual goal.
- Broad Categorized Spending - in addition to very specific categorization (budget categories like “Travel”, “Meals and Entertainment”, etc.) I create a generalized categorization to give me an overview of where money went in the year. I break this up into four categores: taxes, expenses, salary/payroll and retained earnings. Looking at these, percentage-wise, helps me assure that I’m budgeting appropriately on a strategic level. I like to retain around 15% of earnings on a yearly basis for business savings, so this quick report lets me know if I need to watch expenses, take a bigger salary or up my tax withholdings for next year.
Once you have these metrics in front of you, it’s time to set goals with them. I start monthly, choosing to think about what I’ve earned this year, and what’s a reasonable amount of growth to expect monthly. For instance, if last year I averaged $6000/month, I’ll set sales goals for the first quarter at $7500 or so. Doing this gives a realistic basis for your goals, and will feel both attainable but challenging (as goals should be).
Next, using the Broad Categorized Spending metric, it’s easy to figure out how that $7500 will be spent every month. Make sure to adjust those percentages to align with where you want to be next year – don’t copy them verbatim unless you’re happy with the past 12 months’ split. With those percentages applied to the monthly revenue goal, I’ve instantly got savings, salary, expense and tax goals for every month and the whole year. Cool, huh?
Between these 8 metrics, I get a great picture of my business on a yearly basis. As a year draws to a close, I pull these numbers together and use them to tell the story of the past 12 months, as well as give me a firm foundation on which to set next year’s goals. If you aren’t regularly looking at this information, I encourage you to give it a shot (and trust me, it takes time to organize everything) – you’ll be amazed at what you learn about your own business.