The Numbers You Need to Know Most of us are in business to create a surplus, that is, make money.  Yet it is surprising how many business owners wait until the end of their financial year to find out how much profit they have made.  While important for the tax department, this information is of little value to the owners as not much can be done about it.  Business owners need to know the right numbers before they make decisions to ensure they are making money from their efforts.  To find out what numbers you need to know read on… Before we get started, let's get past the most common excuses we hear regarding why people don’t pay more attention to the numbers in their business… The top 3 excuses we hear for not knowing your numbers… I’m not good with numbers In our experience, in most businesses there are only a few key numbers to keep track of. They require basic primary school math to calculate which can easily be learnt. If even this is beyond you, then you can delegate this job to someone else - as long as it is done before the decision is made. It’s only an estimate, how do you know what will really happen? Of course it is only an estimate, but it is an estimate based on your past experience which is vast and careful consideration. Also the power of a number is amazing - if you know at what point something is costing you money, it’s quite incredible what you will do to avoid it.  This is a better scenario than blindly haemorrhaging. I don’t have time… We are yet to find a business that wasn’t doing some kind of work that either lost them money, or they could make more money on.  By analysing your numbers you will save time for yourself by only concentrating on the activities that are worth your effort.  You’ll be surprised at how much time you waste on things that don’t make a profit... or will you? The numbers you need to know There are two areas of importance.  The first relates to creating a surplus – profitability.  The second is being able to fund that creation – cashflow. Profitability You don’t manage your business as a big chunk, so why get all your financial information in a chunk?  Specific job, client, activity or product information is far more useful in making the necessary decisions to increase profitability. In order to create a surplus, you need to know what something is going to cost.  Costs are of many types, fixed, variable, direct, selling, overhead…  It’s usually at this point where people start to lose interest. Two simple rules: know what all your costs are and group them according to what you do. Know all your costs For example there are some costs you have irrespective of whether you sell a bean or not, e.g. rent, telephone, some marketing, office wages, your wages! You must know how much this is and what your weekly or monthly commitment is in this area.  Where possible we like to convert it into something meaningful. For example, we know how many chargeable hours per week we need to do just to cover these costs. We know we haven’t created any profit or surplus funds for other things until we have passed this number.  We do this for Clients too - you need to sell xxx units at a minimum GP margin of x%, or your staff need to do 4 installations a week to cover all their costs.  This is referred to as your break-even point.    Group them according to what you do When you are considering if an activity is profitable, include all the costs: the costs to do the work, e.g. materials, labour the costs to be able to do the work – what proportion of your overhead costs are relevant to doing the work the costs to get the work, e.g. estimating, prospecting, samples even the costs to get paid (especially if the payment terms are lengthy or client unreliable). Compare this to what you can sell it for to see what the activity is really worth to you. An added bonus is by considering all the costs, you can often see ways to reduce them, and/or ways to justify a greater sell price, hence increase your profitability. Another bonus is, these numbers soon turn into targets.  We need to sell x units to justify that new employee, u units to make another $10K profit. Head in the sand??? Some clients who were initially nervous about doing this activity because they knew they were undertaking some things that weren’t profitable, now feel empowered because they are doing things to change this as the problems are now specific and more easily addressed. We know it can be hard…. Initially calculating these numbers can be challenging depending on the complexity of your business and you may wish to include your accountant or a specialist.  We find because we base the numbers on the activities and processes of the business, it is very easy for people to understand as they understand their business.  To make this activity easy on an ongoing basis, it is important to use the many features in your average accounting package – job costing, categories, items, automatic cost calculations, estimates…  Unfortunately the features that add the most value to business are the ones used the least. Cashflow Even though your business is making a good profit, you can still experience cashflow problems.  The typical places cash gets ‘stuck’ are: Debtors – make sure your payment terms are the best you can get in your market and you enforce them. Stock – manage your stuck to meet customer needs, and minimise holding levels.  Work in Progress – having lots of jobs started, but not complete (this is only a problem if you can’t progress claim) finish as much as you can to get the cash in the bank. Capital – it’s important to reinvest in your business, make sure you can fund it, either in cash or the necessary finance payments for a loan.  Do not rob your operating capital for it as it can cause major problems and leave you with few choices. Many a good business has gone belly up, from poor cashflow.  Like everything else in business, it doesn’t take care of itself it needs to be actively managed. Things to watch out for The Power of numbers We all understand that what we measure, we tend to focus on.  For example, if you measure sales, then you may end up with lots of sales but not necessarily all profitable ones.  Make sure you have a balance of performance measures in your business.  Track things like customer compliments or success stories.  Have forums where employees can share their expertise.  Know who’s a good payer and who’s not. The limitation of numbers While numbers are important they don’t tell the whole story – flow on sales, customer service, loyalty -these are important too.  Sometimes you may make a decision where the numbers don’t stack up.  The difference?  It’s an informed decision – you know what you’re doing and why. We can help… We love numbers.  As sad as that seems, it’s true.  We love to delve into your books and processes to see where the value is.  We then summarise what we’ve found, convert it into things that are meaningful to you, as in hours, units, jobs.  You now have the information you need to know what to focus on.  We can also develop your financial/administration systems to easily provide you with more detailed information for ongoing planning and performance measurement.      More KPI Tips      Subscribe to our regular tips   Contact us now    Key Performance Measures Tools River Empowerment Ltd provide the following performance measuring tools, training and consulting services: Consulting Consulting Programmes              Consulting Services                    Training Training Programmes                1 Day Workshops         Tools Complimentary Management Tips                       Return to top