Measuring Microenterprise Profits: Don't Ask How the Sausage is Made

This paper states that the accurate measurement of profits from microenterprises is critical for studying poverty and inequality, measuring returns to education, and evaluating success of microfinance programs. It examines issues related to measurement of profits and draw recommendations for collecting profit data. A majority of microenterprises do not keep financial records, making data collection reliant on recall. The paper attempts to reconcile differences between profits and revenue-expenses. It also makes corrections for recall error and examines if firms deliberately underreported revenues. The study uses data from two panel surveys of microenterprises conducted in Sri Lanka in 2005 and 2006. It presents the following conclusions:

• Firms under report revenues by about 30%;
• Account diaries have significant impacts on both revenues and expenses, but not on profits;
• Simply asking for profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.