If you don’t like numbers (especially business numbers), you’re not alone, but I’ve found the sooner you tackle the monster and get to know it, the sooner you’ll see it’s just a puppy with a bad reputation! Either that, or there’s absolutely no shame in looking at your business numbers with someone you trust.
Let’s find out what chapter four of the Guide to Starting a Business has to say about business numbers…
Explanation of financial reports
Chapter four kicks off with explaining what elements allow you to balance your accounts and keep an eye on your profitability.
Balance Sheet
- Assets – fixed and current
- Liabilities – Current and long-term
- Capital reserves – profit from the year, retained profit and share capital (if Ltd. Company)
Profit & Loss Account
- Revenue – a summary of sales value from all revenue streams
- Cost of sales/cost of goods sold/variable costs – purchases and direct expenses such as materials, labour and so on
- Expenses/overheads/fixed costs – The day-to-day running of the business.
And then the chapter moves on to knowing your break-even point. This is the minimum number of sales you can make to cover your costs and expenses and stay in business without making a loss.
There are seven critical business numbers to know
In any business there are seven numbers that are critical for proactive management and for measuring improvement:
- Profit and loss. How much profit did you make? Deduct your expenses from your income
- Operating costs. How much do you HAVE to spend to stay in business? Whether you made a sale or not.
- Gross profit. Net profit plus operating costs
- Cost of sales. Variable, and relating to anything and anyone that needs funding to make a sale happen
- Revenue. Your sales income minus VAT and any local sales tax
- Average order value. Last year’s revenue divided by total number of sales made
- Number of customers. If you have a high turnover of short-term customers, you can average this number out over a year.
So of these seven, is there one business number which is more important than all the others? Good question…
Actually, no, in short there is no one number relevant to all businesses that serves as the ‘most important’. Your business is different from the next and so you will have a different ‘most important focus’ too.
Your most important business number depends heavily on your industry, stage of growth and strategic goals, but having said that there is one that you could focus on primarily: Gross profit – why? Because you need to know the number to aim for so you can at least pay your overheads and receive the profit you desire for yourself.
Remember: Gross Profit – fixed costs = net profit (how you pay your overheads and yourself)
Once you know your Gross Profit target, you can then break that down by establishing the number of customers needed, at what average order value, at what gross margin %.
There follows a good deal of practical advice to help you with funding your business, record keeping, choosing an accountant, budgeting and forecasting, choosing your key performance indicators (KPIs), managing credit control and making sure you get paid on time.
And then we come to…
Six financial management tips for navigating your business numbers
Effective financial management is vital to the success of and sustainability of your business. Chapter four of the book lays out in detail the following six tips for practical strategies when it comes to the financial aspects of your business:
- Create a clear budget and financial plan
- Understand and sensitise your business numbers
- Monitor and conduct regular reviews of your finances
- Review your expenses
- Implement a cash reserve
- Take professional advice for financial management.
By having a financial management strategy, you can ensure financial stability, give yourself a strong foundation for your business’ growth and know what you need to achieve to reach the point of success you desire and deserve.
Success really is all in the business numbers!
I’m happy to help you calculate any of your numbers or recommend a trusted financial management professional to assist you. If you’d like to read the full chapter on the topic of your business numbers, you can purchase my book, The Financial Times Guide to Starting a Business from the outlets below. In the meantime, I wish you well on your start-up journey.
Amazon | Blackwells | Waterstones