02 Nov 6 Numbers Every Business Owner Should Know
Whether you love finances or not, as a business owner you have no choice but to learn how to understand your numbers and the impact these have on your business. Managing your business finance is incredibly important.
Here are 6 things you should know to track the financial success of your business:
Without money coming in, your business will not be able to sustain operations. When sales are up ascertain you have enough resources to manage and deliver sales. If there is a reduction in sales ensure you have the cash flow to still pay your expenses. Keeping an eye on your sales will help you also determine the sales cycle of your business and therefore assist you with future planning.
How Fast You Receive Your Customer Payments
Your accounts receivable is money owed to you by your customers for goods/services you have provided them. Not collecting your receivables efficiently can lead to cash flow issues and also the risk that they are not paid at all. It’s important to know your ‘Days sales outstanding’ (DSO). The DSO is a measure of the average number of days it takes to collect payments after a sale.
This number shows how much money is left over after the cost of your products (direct costs) is subtracted from the selling price. The key here is to be aware of how much it’s costing you to purchase your products. Don’t forget to ensure the sales price includes a profit margin.
Sales – Direct Costs = Gross Profit
This figure is what’s left over once you deduct your direct costs and operating expenses from your income. It’s a good indicator of whether your business is making or losing money.
Gross Profit – Operating Expenses = Net Profit
Monitoring and tracking your inventory on a regular basis will enable you to spot possible future problems. If you are not reducing your inventory, and have excess, you risk potential waste and storage costs. Having inventory sitting on shelves for too long reduces your profits.
In simple terms this is the amount of money expected to flow into your business from sales and leave your business to pay expenses. Remember, checking your bank account won’t quite cut it. You have to know how much money you are due to pay out and when as well as how much is coming in from sales. A cash flow statement will give you a clear view of whether you are able to meet your expenses and help clarify possible seasonal changes in cash flow.
Knowing these figures will help you monitor the financial health of your business, and become aware of possible problems that may be prevented with planning and foresight. It will also mean you become more confident with decision making, and give you more control over the future of your business….and help you sleep better at night!
If this has struck a cord then please get in touch. I’d love to see if I can help you get back on track.