Know Your Numbers

Before you make a snap decision that this article is not for you, “I know my numbers” , I hear you say, bear with me for a minute. Do you really know what your numbers are saying and what that really means for you, your family and your business, with absolute clarity?  Or would you just have a gut feel?  If hand on heart you answered with a “I’m not 100% sure”, then you are not alone!

 

Why is it important for a business owner to “know their numbers”

 

In short good Management information will give you the comfort factor that you have the most relevant, up to date information to make the right decisions for you and your business. Rather than leaving it to chance and guessing using out of date information at best, from the last set of annual accounts, which only gives you part of the picture.

 

Quite simply, you could be making devastatingly bad decisions that are damaging the business just because you don’t understand the business finances. How can you launch a new product or service if you don’t understand what the numbers mean?

 

  • Most business owners when questioned said ” My accountant produces the numbers, I leave it all to them”, This is a really bad move, it’s your business and you should be working together with your accountant to have the best business you can, that delivers on what you and your family want.
  • All too often I hear “I’m too small to have Management Information or I can’t afford it” Sadly you can’t afford not too if you want to stay in business and flourish.

 

So just what numbers should successful business owners know

 

1) Gross Profit of your products and services

 

Gross profit is the amount of money that is made from selling a product or service and for many businesses this can vary widely so it’s critical you know them.

If not you could focus on selling just low margin products and services with the net result of you being very busy but for little extra profit.

 

2) Profitability of customers

It’s critical to know the profitability of your existing customers. For any that you find you make a loss or very little, focus on what you can do to increase profit (eg increase their prices) maybe one profitable option is to get rid of them!

 

3) Your business costs

Every business has costs and it’s crucial you know the difference between them.

  • Variable costs – These tend to rise and fall in line with your sales (eg if you sell more products then you will have to spend more on stock or raw materials).
  • Fixed Costs – These have to be paid no matter what and as a business grows these costs rise (eg rent for premises or wages for staff). It’s imperative to include them in your gross profit % and budget for them so that you know it makes sound financial sense.

 

4) Break even point

There are two break even points you should know. Firstly, what must the sales be to make a profit (Traditional break even)? Secondly, what must the sales then rise to in order to take the cash out of the business you want to live your life style?

 

5) Return on your marketing/Lifetime value of a customer

Most businesses spend cash on some form of marketing to get new customers. For each marketing pillar (ie website, SEO, PPC, telemarketing, etc) you need to know if you’re getting value for money. You can then make informed decisions on whether certain marketing activities are effective or not! What is the life time value for each new customer and how much are you prepared to spend to get them?

 

6) Cash

All businesses need cash to pay the bills as they fall due and without cash they fail which means managing cashflow is crucial. A key part of this is knowing your debtor and creditor day numbers – how long on average does it take to be paid by your customers and for you to pay your suppliers. Ideally the gap between the two needs to be small and the bigger it is the more cash the business will need to pay suppliers whilst it waits for its customers to pay.

 

 

Remember 60% of business owners are getting by on very little profit and 20% are losing money. Don’t you be one of the 80% who are struggling?  By “knowing your numbers” and bringing some one in to help and advise you, you could be one of the 20% who are super successful!!  KNOW YOUR NUMBERS and if you don’t ask your advisors for help. 

 

If you would like our free e-book on knowing your numbers and for more information on growing your profitability through good financial management information take a look at our website for some top tips and guides at www.kmaaccountancy.co.uk and follow me on twitter @KMAltd.  If you would like to talk to us contact us on 0845 3370 572.

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info@kmaaccountancy.co.uk

KMA Accountancy
Progress House
17 Cecil Road
Hale
Altrincham
Cheshire WA15 9NZ

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