Know your numbers & win............ #7
- Adrian Dionisio - business737 owner
- Nov 2, 2020
- 6 min read
Updated: Mar 21, 2024
Business is all about numbers, and the numbers are telling you a story.
If you want to be in business for the long haul, you need to understand that story.
One of the most important things to do with your business is to continually track the numbers, no matter what business, what industry. These numbers can be used to determine if your business is operating as you intended and if the results are sufficient.
Ultimately your business must be profitable and bring in enough money to justify the time and energy you are investing. One of those unexplainable rules of life is that you attract what you focus on. So focus and track these numbers, especially revenue, costs and profit!
Understand the language of your business, know your numbers
Is your business thriving? Or is it just getting by? How would you even know?
Finance involves looking at numbers. Financial analysis can be used as a foundation to make decisions such as how to allocate money, time and resources. Accounting ensures data used for finance decisions is as accurate as possible.
I would encourage everyone to be involved with their business accounts where possible. It will give you greater control and understanding when it comes to decision making in your day to day business activities and operations.
Finance is essential and easy to understand as long as you know what to focus on
What you get to keep (profit) is essentially more important than what you make (revenue).
The total that you bring in must be greater than everything that is spent (revenue must exceed expenses).
If it does not, the business will not be viable.
If it does, the business will be generating a profit.
A business must be profitable to make it worthwhile to continue to invest time and energy. More profitable businesses are better equipped to handle an unforeseeable future and to survive unexpected events
The best businesses create enormous value whilst keeping costs low.
Knowing the numbers can help you identify where your business is losing money and also show what products /services are making you the most money.
It will help you have a clear understanding of how much your business needs to earn to meet it’s objectives. It will also provide a clearer understanding of how you can increase profits.
Basic Finance calculations and numbers everyone needs to know
It is extremely useful to look at different types of financial calculations to track and understand how the business is performing. The numbers don’t lie.
Cash Flow statement
The cash flow statement is the best place to begin. It is very simple and basic. Record the cash that flows in and the cash that flows out on a daily / weekly / monthly / yearly basis. The total should never go below zero. You should be making more than you spend. With more money you can introduce new offers, purchase equipment, bring in new employees, invest in marketing and so on. A business with more money generally has more options and is more resilient.
The cash flow statement is a good starting point and useful for a quick snapshot of performance. However, especially for more complex businesses, it is not a true representation of profit.
There are many more useful tools that really allow you to understand the story of your business.
Income statement
Also known as a:
Profit & loss statement
Operating statement
Earnings statement
It is much easier and reliable to use this method to look at profitability. Cash flow statements do not account things such as expenses paid much later down the line or extended credit for customers. Income statements however trace revenue and expenses on an accrual basis.
Again this is a very simple yet effective financial tool that’s easy to understand and use. The more accurate the income statement the better you’ll be able to manage your business.
Balance Sheet
This is a snap shot of what a business owns and owes at a particular point in time. A balance sheet is an estimate of the net worth of a business at a given moment. A balance sheet always balances, if it doesn’t an error has been made.
Balance sheets can be compared to see how assets / liabilities and net worth have changed over time. They answer important and valuable questions about the financial health of a business over time. These can reflect the solvency of a company, how well it pays it’s debts and how it’s value has changed over time.
Be aware that many assumptions have to be made, such as the value of assets, inventory and the value of the brand name to name a few. Often these are left to the discretion and creativity of an accountant or the financial department. Where possible it is advisable to do an appraisal yourself, in an accrual and honest manner to paint as clear and accurate picture as possible.
Profit Margin
This is the difference between what a business makes minus the costs, expressed as a percentage. Ideally a business will want their profit margin to be as high as possible. The higher the profit margin, the stronger the business.
A business sells their product for £80.
All the associated product costs and expenses amount to £40.
So the profit margin if a very healthy 50%!
(80 - 40 ) / 80 = 0.5 x 100% = 50% Profit Margin!
Profit Margin is important because it shows the general health of a business. It gauges the degree to which a company or a business activity makes money. It is very simple to calculate profit margin and very important for any business to be aware of their profit margins when it comes to decision making, strategies and planning.
Being aware of your profit margins will enable you to set monthly revenue and profit targets. Once you have set the targets you can make the necessary business decisions to ensure these targets are met.
Suppose you have calculated your profit margin to be 5%. Your monthly profit target is £10,000.
You can make a simple calculation to show you how much revenue you need to make for the month
Revenue = Profit / (Profit Margin /100)
= 10000 / 0.05 = £ 200, 000
You will have to generate a monthly revenue target of £200,000 to hit your monthly profit target.
If you feel this revenue target is unrealistic you now can consider other options such as finding ways to reduce costs, increase sales, increase price and so forth.
By analysing the numbers of your business is like having a map that provides guidance and a constant point of reference.
Of course Business is not only about constantly maximising profits, increasing profit margins and mark-up. As long as there is enough profit there can be other associated rewards for your business such as to help others, creative endeavours etc.
Markup
Profit Margin can never exceed 100%. It is important to be able to distinguish between Profit Margin and Markup (which can be any value, 200%, 300% and beyond).
So the Markup of our product selling at £80 is:
(80-40) /40 x 100 = 100 % Markup!
Have you considered how much better you could make your business if you know you numbers better?
Often accountants and book keepers make many estimates and assumptions. They can make profits look bigger than they actually are. That is why it is always best to look and understand the numbers yourself.
The numbers will give you a true reflection of what is happening in your business. They will help you recognise and understand processes and occurrences such as seasonal and periodic fluctuations. The numbers will paint a picture of how the business is performing.
There are 1000s of financial ratios but in general you’ll only need a small set specific to your business. You are the expert of your business and nobody knows your business better than you. Research to see what is most appropriate to your business. The numbers can be used to make better decisions and make your business better and more productive.
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