Last week we spoke about the importance of regularly reviewing your financial statements and how crucial it is for business owners to really know their numbers. Most small business owners do this when they first open their business by either following a business plan or just keeping track of what’s coming in and going out.
But as a business grows, sometimes business owners tend to pursue sales and fail to keep up with the numbers. As the Chief Financial Officer of many businesses who we do bookkeeping for, I want to remind you that knowing your numbers is the number one way to grow your business. So what numbers should you keep an eye on? Here are most important numbers any business owner should know:
- REVENUE – How much did your company make last quarter, last month or even last week? As a business owner, you should always know this number. Some of my bookkeeping clients require us to tell them this number daily. Once you know your revenues, you have a basis to compare business to date with business last year for the same time period. Knowing your numbers will let you know if your business is developing into what you envisioned.
- EXPENSES – This is a general term, but for most business owners this includes knowing the salaries or compensation of yourself and your employees. Another common expense is marketing or advertising. Whether your business relies on social media, Search Engine Optimization (SEO services) or places ads in the paper to advertise, knowing how much you spend on each and whether it’s paying off is a must. Finally, knowing how much you spend on improving your product, also known as Research and Development, is crucial. This number can fluctuate, but it’s also an expense that can either be cut back on or added to depending on your cash flow.
- CASH FLOW VS. WORKING CAPITAL – Cash flow is the money you have coming in and out of your business. Working capital is the money you have at the moment to carry out your daily business. Working capital is a measure of your company’s short-term financial health and operating efficiency, and is calculated by subtracting your current liabilities by your current assets. We usually recommend our clients have $1.20 to $2 dollars of current assets for every $1 of current liabilities. If your working capital is higher than this, your company’s efficiency could be a problem. Usually this is a result of slow collection. If you know your working capital, you could compare this number to your working capital last year, to measure efficiency.
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- PROFIT: NET vs. GROSS – Net profit, also known as the bottom line, is the number you get after subtracting a company’s total expenses from total revenue. Gross profit is revenues minus the cost of producing your product. You should have 50% or more of your gross profit left in order to consider your company financially healthy.
- PROFIT MARGIN – Your profit margin is the number that tells you how profitable your business is. To figure out this number you need to subtract your expenses from your gross profit, then divide the number by your sales. If the number is negative, then you are losing money. You may want to compare this number to the number from the same period last year. You may also want to see what the profit margin is in your industry. If your number falls well below that figure, you may need to change one of your business tactics to up your profit margin.
Knowing your numbers is critical to the success of any business, whether you’re a small to medium-sized establishment or a large corporation. Knowing your numbers will allow you to spot problems in your business, like missing inventory, delinquent clients or slow collections. Knowing your numbers can also help you decide if it’s time to raise your prices.
At DM Accounting, we love numbers and check them constantly so our clients’ businesses can thrive and grow. If you ever need any help calculating the future of your business, e-mail or give us a call.
Have a great week!