Many business owners do a quick eye roll or sigh when it comes to thinking about the numbers in our business. After all, we became entrepreneurs to change the world, not to become bean counters. Right?
But, the truth of the matter is, if you don’t understand your numbers, chances are your business won’t survive long enough to change your life let alone anyone else’s.
They’re that important.
I do get it that looking at the numbers can be like peering into a deep black hole. One that can appear bottomless at time. It can be overwhelming.
Like most things in business, it doesn’t need to be.
There is that whole foreign language of Cash flow statements, balance sheets, P & L’s… I’ll stop there before I lose you.
My very first piece of advice is to find yourself a good accountant. One who deals with small business owners and knows the landscape well.
Then let them do their job. Have a great conversation with them and ask them which numbers you should be aware of, and watching.
In my experience they are as follows:
1. Cash Flow Cycle
This is one of those issues that can really sneak up and trip you if you’re not on top of it.
Your cash flow cycle basically monitors the cash coming in, and the cash going out, and for it to be healthy the cash coming in needs to cover the cash going out.
Here’s a quick story for you…
When our business went through explosive growth back in 2011 we had a number of large corporate clients, with payment cycles of 90 days after invoice submission. We also had contractors we hired to work on the projects, with payment terms of 14 days after they submitted their invoice to us.
So, the invoices we submitted were worth hundreds of thousands of dollars. We had to wait more than three months, while the contractors wanted paying within 14 days. See the problem?
We had such a huge shortfall it could have sent us under. An understanding of the cash flow cycles (and some quick renegotiation’s) made sure our cash kept flowing.
2. Cash flow forecast
Actually monitoring what’s happening and what’s going to happen with your cash flow is a great way to see exactly what’s happening in your business for the next 30, 60, 90 days. If you monitor the cash flow over a period of time, you can plan accordingly, and you’re far less likely to run into problems.
3. Gross Profit Margin
When you subtract the cost of producing your goods from the amount of income they generated, you have the gross profit margin. If you sell an item for $100 and it cost you $30 to produce you have a gross profit margin of 70%
4. Net Profit
Also known as net income, it is basically what you have left at the end of the day after you’ve subtracted all expenses in your business To reach this figure you begin with your total business income, and you subtract all the expenses you incur to run your business (don’t forget to include tax and superannuation).
While we’re talking about expenses, a good exercise is to go through your bank account and credit card statements and record all the recurring expenses you have. It’s interesting how many of them slip by under the radar month after month.
The more detailed you are in recording your expenses, the better you will hold on to your hard earned cash.
5. Profit and Loss Statement
Just as the title suggests, this statement will let you know just how profitable your business is usually in a given period of time. Every three months is a good idea as it’s also when you prepare for BAS . It is a basic formula: Your Income minus your expenses = a positive amount (profit) or a negative amount (loss). Knowing your profit and loss helps you to predict your cash forecast.
6. Overhead Expenses
These are the fixed expenses you have to meet no matter what is happening in your business. The most obvious overhead expenses are rent, insurances, wages etc.
When our sales figures start to stagnate, or heaven forbid, start dropping, then we know we need to take action. Either way they’re a good number to watch.
So there you have it, the seven financials to watch. There are of course many other numbers you can get to know, but staying on top of the above will hold you in good stead financially.
As I mentioned in the first paragraph, one of the best things you can do for you and your business is to find a good accountant and build a good relationship with them. It’s all about peace of mind and staying on top of your numbers will go a long way in giving you that.
Here’s to Your Success!