Know Your Numbers
As a business owner, you absolutely have to know your numbers.
Entrepreneur Marcus Lemonis, the host of CNBC’s “The Profit,” has a saying: “If you don’t know your numbers, you don’t know your business!” I would add to that, “… and before long you’ll be out of business.”
So many companies get into extremely tight or emergency cash flow situations, and it seems to come as a surprise to the owner. Far too often, businesses are on their way out of business, and the owner doesn’t even realize it until it’s too late. Why? Because they don’t know their numbers! The shame of it all is that it’s not that hard to know, understand and use your numbers to build a better business.
It’s your responsibility to all who depend on the business (your family, team, customers and vendors) to generate the necessary profits and cash flow. That’s all there is to it. You choose to be a business owner, so you better understand what drives your business’s profitability and cash flow.
Of course, to know your numbers, the business must have a competent bookkeeping, accounting and finance function. That can mean many different things, depending on the size and complexity of your business.
So what do you need to know, in order to actually know your numbers? The following is by no means all inclusive, and is a bare-bones minimum.
Gross profit margin // What is the minimum gross profit margin you need on every single sale today in order to meet your profitability and cash flow goals? Every day small business owners make decisions to cut prices or give special discounts in order to make the sale. And that’s OK, but only if you understand what it’s doing to your margin on that particular sale and how it affects the business’s profits and cash flow overall.
Breakeven point // All business owners should have a feel for their sales breakeven point. The breakeven point is where the business has sold just enough to cover all its costs and expenses. (So the next sale past the breakeven point will put the business into a profitable state.) We typically determine the monthly sales breakeven point for our clients. But many of our clients break that down to daily sales breakeven points, so they can understand how the business is doing all the time.
Cash position and cash needs // How much cash does the business have available, and what are the required cash disbursements this week?
Vendor “payables aging” and customer “receivables aging” // These should be up-to-date and accurate.
Summary of larger cash flow movements in the near future // For example: The loan payment is due next Tuesday, our largest customer will be paying us this Friday, biweekly payroll is next Monday, monthly payroll taxes are due in 10 days, etc.
Some sort of sales report // That way, you have a feel for how you’re doing this week and month-to-date against breakeven points or sales goals.
Financial statements // This is your income statement, balance sheet and statement of cash flows. Understanding financial statements may take some coaching and practice, but you can master this. We help our clients read financials all the time. The main point here is to gain insight every month into gross profit, net profitability, cash flow and liquidity. The focus should be more on the overall financial health of the business, and not just top-line revenue.
Comparative and predictive reports, such as actual results vs. forecast // A reliable financial forecast is the next level of knowing your numbers. If you are actually using a financial forecast to help make business decisions, then you are way ahead of 99 percent of your competition.
All the above is just a starting point. Depending on your industry, there are many other key performance indicators you should be analyzing, other than gross profit and breakeven point.
With competent accounting and finance help, knowing your numbers is not difficult or time-consuming. There’s really no excuse for not deeply understanding your numbers.
It takes just five minutes a day to review daily, weekly and month-to-date sales levels. In 15 to 30 minutes a week, you can know your current cash position and cash needs. You need maybe an hour or two a month to review financials and business performance against forecasted goals.
Know your numbers. Drive your business forward.