Business Math: Helping You Demystify Revenue, Profits, Margins, and More!
Today, in podcast land, you get a double dose of goodness. We spent so much time talking about the wonder of basic business math that we dedicated a Big Bad Bonus episode specifically to talk through CLTV and CAC. Enjoy!
Heads up: we may earn a commission if you buy through our links (marked with a *), at no extra cost to you! But here’s the deal: we don’t promote anything we don't use ourselves. Every brand we back has earned its spot in our lineup.
How we know the math needs mathing
Here’s how our conversations with small business owners typically start.
Us👭: “So why are you interested in working with us?”
Prospect🤔: “Because I want to get more leads for my business. I need to make more money.”
Us👭: “We hear that a lot. Talk us through the numbers for your business:
What’s your revenue?
How much of that is profit?
What’s your average sale value?
What’s your profit margin?”
Prospect😕: “Well, I’m not 100% sure, but I think I’d like to make around $10,000 per month.”
Us👭: “Okayyyyy, so how many customers do you need to close or products do you need to sell to make $10,000 per month, and is that pure profit or overall revenue? Can you also share how much it takes to run your business each month, strictly to keep the lights on?”
Prospect😧: “I’m going to have to get back to you on all of that.”
Us👭: “We’re happy to help you walk through how to calculate those numbers as part of our 12-week marketing bootcamp, where we help small business owners build the foundations for their marketing, which includes spending a few weeks just breaking down the math.”
Prospect (now customer)😍: “You’re a lifesaver, I literally don’t know how I’ve made it this far without the support of Big Bad Marketing.”
Okay, okay, maybe we embellished a bit there at the end, but you get our point. The vast majority of business owners we talk to have yet to figure out the basics of their business math. But why?
Probably because math sucks.
How many math classes did you snore your way through in school and think to yourself, “Seriously, am I ever going to use any of this again?”. Well, the good news is that today is the day when you harken back to your grade school days, pull that basic arithmetic out of your back pocket, and put it to use.
Feel free to take a moment to send a note to your favorite teacher and thank them for preparing you for this future state, where you’re actually using something you learned long ago.
But before we officially hop into talking numbers, we need to plant this BIG OL’ DISCLAIMER: GO TALK TO A CPA WE ARE NOT FINANCIAL PEOPLE AND THIS IS NOT FINANCIAL ADVICE BUT PURELY FOR EDUCATIONAL/ENTERTAINMENT PURPOSES. WE LITERALLY DON’T KNOW ANYTHING ABOUT ANYTHING, BUT THEY LET US PUT STUFF OUT ON THE INTERNET FOR FUNSIES.
Business math: Breaking down the basics
In our world, you can get by with understanding the health of your business and marketing efforts by knowing just a few key calculations. These are the biggies that we’ll cover in this post:
Let’s jump right in.
Revenue is the total amount of money your business brings in.
How to calculate: The total of all sales in a given period (often monthly and annual intervals).
If you run a t-shirt shop and you sold 100 shirts this month at $20 each, your revenue is $2,000.
Why does it matter that you know this? Top-line revenue is a number that’s commonly used as a measure of how well your business is doing and how much you’re growing. It’s a great baseline to help you set goals and can be a leading indicator of problems if it starts to dip. It may also be among the first questions an investors ask if you’re looking for someone to invest in your business.
BBM Pro tip: Lucky for you, a good CRM software (we use Honeybook*) can keep track of this, and literally all you have to do is log in and check the overall number.
The COGS is the direct cost of producing the thing you sell.
How to calculate: COGS (product) = Beginning Inventory + Purchases − Ending Inventory
Let’s assume you paid $500 to produce the inventory of t-shirts you sold (100 shirts at $5 each). Then you bought another 100 shirts at the same price to restock your supply. Your COGS calculation is $500 + $500 - $500 = $500.
COGS is fairly straightforward for products, but can get a little confusing when we start to talk services. In that case, we flip to the concept of COS.
How to calculate: COS (service-based business) = Direct Labor + Consumable Supplies + Facility Costs (if applicable)
Say you also own a gym in addition to running your t-shirt business. In your COS calculation, you’ll need to consider variables like:
Paying the coaching staff: $2,500
Cleaning costs: $250
Equipment maintenance and restocking supplies: $250
Facility rental: $1,000
The total COS for your gym is $4,000.
Here is where you might want to consult a bookkeeper, CPA, or other math professional, because sometimes certain costs should be included, but only if they support the service itself. For example, an admin salary, marketing efforts, or software could be included in COS or they’d go under operating expenses depending on your biz. Go talk to a legit professional for the down-and-dirty granular math, we’re keeping things high level here to get you thinking about your business numbers.
Why does it matter that you know this? COGS/COS is critical to know because it tells you how much it actually costs to do the thing you do. It’s shocking how many business owners are completely flying blind when it comes to the cost to produce things and then they end up feeling like they’re barely making it each month.
Profit is the amount of money your business makes after you consider your expenses (COGS or COS).
How to calculate: Revenue - COGS/COS = Gross Profit
Using our same t-shirt example above, if you take your $2,000 in revenue and subtract your $500 COGS, your gross profit is $1,500.
Why does it matter that you know this? Gross profit can help you understand whether a particular product or service is profitable. It’s a quick and easy way to let you know if you’re charging the right amount to effectively cover the cost of the thing you’re selling.
Gross Profit Margin
The percentage of revenue that remains after covering direct costs.
How to calculate: (Gross Profit ÷ Revenue) × 100
For your t-shirt business, you’re looking at a 75% gross profit margin (($1,500/$2,000) x 100).
Why does it matter that you know this? A gross profit margin is an indicator of how efficiently your biz is making money. It tells you how much money you’re keeping from each dollar of sales once you cover the direct cost of producing the thing. But before you treat this as the end-all, be-all success metric for your business, we’ve gotta drop one level deeper.
Net profit considers all expenses, including COGS, taxes, interest, and everything else that goes into running your business. This is the actual “money in the bank” that business owners are after.
How to calculate: (Revenue - Total expenses)
Now, instead of just using your COGS or COS, you’re considering all of the operating expenses of running your business. For the t-shirt shop that might look like:
Software (website, CRM): $400
Marketing and advertising: $600
COGS: $500
When you consider the all-in expenses for your biz, you’re looking at a net profit amount of $500 ($2,000-(600+500+400)).
Why does it matter that you know this? Net profit is the good stuff, the money that’s in your pocket when all is said and done. It’s your reward as a small business owner for all the long hours you put into doing that thing you do.
Net Profit Margin
The percentage of revenue that turns into profit.
How to calculate: (Net Profit÷Revenue)×100
For our t-shirt biz, it looks like this: ($500/$2000) for a 25% margin.
Why does it matter that you know this? Net profit margin is the percentage of revenue that finds its way into your pocket. The higher this percentage is, the more of your hard-earned money you get to keep.
So, do I use gross or net profit?
Use gross if you’re just interested in the profitability of a product or service. It can help you understand if your prices are accurate and if you can actually cover the costs.
Use net if you want overall business health and profitability. It can tell you if you’re actually making money when all is said and done.
BUT wait, there’s more. (This is the part where we really want to say that if you order in the next 17 minutes, we’ll throw in a knit pot holder for free.🛍️)
Cash flow is the movement of money in and out of your business.
How to calculate: Dollars in💵 - dollars out💸
Why does it matter that you know this? A positive cash flow means you have more money coming in than going out. (This is good!) Negative cash flow means you have more money going out than coming in, which can be common in early-stage businesses. A business that experiences a negative cash flow for too long is likely to go out of business.
A cash flow problem could be why it may seem like you’re doing tons of business/making lots of sales, but you’re not actually making a lot of money.
PHEW, we just covered a lot of things and mathed a lot of math. Now we’ll help you answer the next questions that are coming up in your head, like “okay great, now I have a list of numbers, how do I know if they’re good though?”. We got you, stick with us.
What are good numbers for revenue, profit, margins, etc.?
Knowing what the numbers are is a great step, but ultimately, what all business owners want to know is, “Am I doing okay compared to other businesses like mine?”
Differences in the definition of “good” vary depending on a few factors, including:
Industry: Certain industries are going to generate higher revenues, margins, and profits. A software company (low cost of delivery, scalable) is likely to have higher margins than a grocery store (perishable inventory, high competition). There’s no way around this one, folks. If you don’t like it, change industries.
The purpose of the business: A side hustle selling art by hand is likely not to create as much revenue as a full-time business, and maybe you don’t want it to. Maybe you’re turning your passion into a few extra bucks, and that’s enough for you. We love this and applaud it, not every business owner needs ambitious goals of making a unicorn exit, sometimes making an extra $1000 per month to pay for a few nice vacations a year is the sweet spot.
How much you’re reinvesting in the business: Pouring a lot of money into the business could mean certain numbers are lower in the short term, but that type of strategic investment hopefully means higher margins and profits in the long term.
Reinvesting can be smart if it fuels growth, but keep an eye on:
✅ Revenue growth (10-20%+ annually)
✅ Net profit margin (stay above 5-10%)
✅ Cash flow (avoid running out of cash)
All that said, gross profit margins between 30-50% are generally considered to be healthy, but keep in mind that’s going to differ by industry. Net profit margins of 10-20% or more tend to also be good. Less than 5% would be worrisome.
A real-life look at what would be “good” numbers for product and service-based businesses
Here’s a quick look at what might be considered good business math for the two businesses we’ve been exploring, a gym and a t-shirt business.
Gym🏋️
Gross Profit Margin: 40-60% (membership fees are high-margin, but equipment, rent, and staff costs eat into profits)
Net Profit Margin: 10-20% (successful gyms)
Low-end gyms (~5% margin) struggle with high overhead costs, while premium gyms (20% margin or higher) make more from personal training and high-ticket memberships.
T-Shirt biz👕
Gross Profit Margin: 40-70% (depends on printing method: print-on-demand is lower, bulk printing is higher)
Net Profit Margin: 10-30% (higher for direct-to-consumer brands, lower for wholesalers)
But before you run off to change everything about your business to get to a 40-70% profit margin, can we offer you a quick reframe?
Instead of aiming for a particular number you’ve earmarked as “good”, you could look for change over time.
I.e., is your revenue growing year over year? Are you seeing a solid 10-20% increase?
And are the margins staying steady or growing too? Increasing revenue is great, but if margins are low or cash flow is negative, it’s probably not actually helping your business to continue to sell, sell, sell when there’s clearly something a bit off with the business foundation.
BBM Hot Take: You don’t need to increase your marketing efforts if you have a margin problem.
Because it doesn’t help to add more fuel to a fire that’s literally burning down the house. That’s why we help business owners assess their business foundations in our 12-week marketing boot camp. Check it out.
What about math for your marketing?
Okay, so now you know the basic math for your business, revenue, profit, margins, cash flow, all the goodness. But what about using numbers to assess the effectiveness of your marketing? Here are two key numbers to know.
Customer lifetime value is, as you may have guessed, the value of a particular customer as long as they remain a customer of your business.
How to calculate: Average Purchase Value × Purchase Frequency × Customer Lifespan
Say your average customer buys 2 t-shirts for $40, and they purchase from you 3 times over one year. That means your customer lifetime value is $120.
To improve CLTV, you can increase the average purchase value, increase the number of times someone purchases from you, or increase the customer lifespan. (This is where marketing efforts come into play, like email marketing campaigns to nurture customers, trying to lure them back with sales, etc.)
Why does it matter that you know this? CLTV shows what a customer is worth to your business over time. A higher CLTV also tells you how much you can afford to spend to acquire a new customer. Which leads us to….
Customer acquisition cost is the cost of finding a new customer.
How to calculate: Total marketing and sales costs/number of new customers acquired
Let’s say for your t-shirt business, you’re solely promoting through paid advertising campaigns on Facebook and Instagram. Over one month, you spent a total of $500 running paid ads through those two channels. In addition to paid ads, you use graphics created by your marketing agency, which you pay $300 per month for. Add in your email marketing service at $20 for your total marketing and sales costs.
All in, you spend $820/month running those ads. Say you acquire 10 new customers (people who convert) with those ads, that means your CAC is $82.
To stay profitable, many people recommend CLTV that’s at least 3X CAC. In our case, $120/82 = 1.4. To hit 3X, we’d need to bring our CAC down to $40, or acquire at least 21 customers each month off those ads.
Why does it matter that you know this? Your CAC lets you know if your marketing efforts make sense! If you’re spending more to get a customer than you’re making off them, that means you’re actively losing money, and that should be a HUGE red flag. This is another area that might expose why you feel like you’re barely making it each month. When you’re paying too much to get a customer that’s not returning the value in their purchase, the business model itself may not actually be viable.
Best practices for business math
Now that we’ve covered all of the numbers you need to know, we’ll let you marinate in the math and leave you with a few best practices.
Know your numbers! Your business metrics are not a time to bury your head in the sand. Knowing these numbers is extremely important for the success of your company in time. Use software if it helps, or talk to a bookkeeper. But do not, under any circumstances, keep making excuses that you don’t know how to calculate it. Because we know you’re lying or you haven’t actually read this article.
Keep the costs of producing your product or service as low as possible. The cheaper you can make it to do the thing you do, the more money in your pocket. This is why so many business owners explore things like outsourcing, negotiating with vendors, or switching to more affordable packaging.
Find a balance of products and services if it makes sense. Since profit margins on products tend to be higher, some service-based businesses also look to retail. That’s why you’ll see gyms selling t-shirts or marketing companies offering courses or template bundles.
Need help getting the math to math? We’d LOVE to help, we thought you’d never ask! Schedule a free 15-minute consultation, and we’ll see if working together is a fit.
