Business finance experts have countless metrics and complex ratios for tracking a business’s performance and financial health. But for the busy studio, a few studio metrics stand out because they strike a balance between simplicity and usefulness.
- Net Profit
Six-figure incomes and record-breaking sales make good headlines, but top line revenue by itself is a pretty poor measure of a business’s financial position. After all, there are plenty of businesses that generate millions of dollars in revenue and still are not profitable. What really matters is what we’re left with after the business expenses have been paid. That’s net profit. For most independent teachers, net profit is what they pay themselves.
NET PROFIT = TOTAL REVENUE - TOTAL EXPENSES
- Profit Margin
Profit margin is net profit as a percentage of total revenue. It’s useful for comparing our profitability over time and making sure our expenses stay in check even if income fluctuates. Profit margin can also help us see how our business compares to industry norms.
PROFIT MARGIN (%) = NET PROFIT ÷ TOTAL REVENUE
Profit margin can vary widely depending on accounting practices. For independent teachers 75–90% profit is fairly standard. Keep in mind, this number typically represents the teacher’s full earnings, which is why it is so high. For multi-teacher studios, 5–15% net profit (after all wages and salaries have been paid) is a good target, but it will be higher if the owner pays themselves from the profits rather than drawing a salary.
- Fixed Costs
These are the expenses incurred every month just to open the doors, regardless of whether we generate any revenue or how many students we serve. Consider expenses like studio rent, utilities, insurance, website and software fees, instrument maintenance, etc. Independent teachers may also want to include the bare minimum salary they need to cover their personal expenses for the month. Multi-teacher studio owners should include administrative salaries in this number, but not teaching wages that are dependent on lesson revenue.
This number tells us how much cash we need on hand to run our business for any given month.
- Cash Reserves and Runway
Imagine we must suddenly stop business operations for some reason and our income drops to zero. Prior to 2020 this might have seemed unlikely, but it’s the situation most small business owners found themselves in when the COVID-19 pandemic hit. Pandemics aside, teachers also find themselves in this position when they encounter an unexpected health issue, family emergency or other crisis that requires them to step away from their business.
Even though we’re not generating income, we still must cover those fixed costs. Our runway is the length of time we can sustain ourselves and/or our business from cash reserves (savings) while we figure out our next steps. The longer our runway, the more resilient our business will be to weather these storms.
RUNWAY (number of months) = AVAILABLE CASH ÷ MONTHLY FIXED COSTS
- A Goal!
The first four metrics keep us on track, while this one drives us forward. When we have a goal in mind, whether it’s a profit margin we want to hit or a certain level of cash reserves, we naturally start noticing opportunities that will bring us closer to that goal. Write it down and review it often. Track the metrics that support it and, above all, don’t forget to celebrate when you achieve it!