Know your numbers. When I ask businesspeople “What are your critical business numbers?” many say “Oh, I’d have to ask my accountant.” I get this from sole traders and from managers of larger businesses with accounting departments.
It is a common mistake to run a business hoping that the Tax accounts at the end of the year will be ‘a good result’. Those accounts are a ‘Lag indicator’ because there is a lag (delay) between what occurs and when you account for it. By the time you get those numbers, it is too late to do anything about their cause.
The numbers that you must know and actively manage are the ‘lead indicators’ of the business. These numbers enable action to be taken to achieve the necessary results.
You have a Vision for your business, you know where you will market your offerings, you have a clear strategy in place, and you have a plan that you are implementing. To operate effectively, you need constant feedback on how your strategy and its execution are performing.
Each business will have a set of numbers that it can use as a ‘Score Board’ to show if it is on target. Every business should have a Business Plan that includes the budget for the year ahead as a “P&L” (profit and loss statement) broken down monthly. It shows: Revenue (Sales) that you are budgeting; the Cost of Goods Sold (COGS); the Gross Margin, which is the difference between what you sell and the costs for those offerings; your fixed overheads, often referred to as “SG&A” (Sales, General and Administration); Operating Profit (Earnings Before Interest, Tax, and Depreciation or EBIDA); and Net Profit – the amount that is earned after everything else is taken out.
The Business Plan must also include a ‘Balance Sheet’ showing Assets, Liabilities and Equity in the business. Get your accountant to set up these documents and explain them to you. You must understand these documents to be able to manage the business successfully. If necessary, take a short course (physical or virtual) on fundamental business financials.
Now that you have the Budget, know the numbers that will provide the required results. For example, how many transactions per day/week/month do you need to achieve your Revenue target? What is the Gross Margin/Profit (‘GM or ‘GP’) on each transaction? Are your overheads (SG&A) within budget? Are you spending your marketing allocation wisely to attract new sales? Are your staff overheads appropriate to serve your customers profitably. Are your stock levels appropriate? A lot of working capital can be tied up in stock that is not ‘turning over’. What is your ‘stock turn’ figure? Do you have items that hardly sell – if so, why have them at all? How many days do you wait to get paid (Days Sales Outstanding). Again, this can tie up a lot of cash. You are probably not a lender, so why offer people interest free credit?
I realise that this all sounds ‘daunting’. Good! Make an appointment with your accountant to have them advise you on ‘a good set of numbers’ for you to run your business, then monitor them religiously as if they are the scoreboard of a game that you are playing on the field because every minute of every day, your business is on the highly competitive field of your market.
As Jack Welch said, “Control your destiny or someone else will” (for instance your competitor). If you want a successful business know your numbers, watch them like a hawk, and take action to capitalise on them with alacrity!
