If You Don’t Know Your Numbers, You Don’t Know Your Business!
By: Kevin Decker
It is surprising how many companies are in existence today with owners that do not have a firm grasp and understanding of the core numbers of their business. We have all seen, what seemed like successful growing companies, all of a sudden go out of business.
Knowing, tracking and continually analyzing your numbers is key to maintaining and growing your business. It does not matter what industry you are in, having a clear picture of the business financial health is critical to success and staying power.
Outside of initial startup costs and year one financial needs projections, every business should track a core set of numbers for their particular type of business. From the standpoint of basics, every company should know and be able to run reports detailing the following:
1. Balance Sheet: A cumulative view of the business strength detailing assets and liabilities.
2. Income Statement: Time boxed reports of profit and loss (P&L) detailing revenue minus expenses for a given period. Statement of Operations
3. Cash Flow Statement: THIS IS CRITCIAL, details the amount of money that has come in and gone out of your business over a given period. Cash is king.
4. Gross Margin: Remaining dollars after subtracting the direct cost of sales.
5. Net Income: Better known as the bottom line, this is the total earnings after all direct and indirect expenses are accounted for.
6. EBITDA: Earnings before interest, taxes, depreciation and amortization.
7. Accounts Receivable Aging: This is a direct driver of cash flow. If you have great sales but high aging, you will have less cash in the bank to pay direct bills and support day to day operations.
8. Cost of Sales: The clear understanding of the total direct cost of delivering your product or service.
Above is a short list of the most critical numbers every business should be tracking weekly. Through knowing and analyzing these numbers, a business can begin to make necessary changes and modifications to the business model in order to improve its financial health and grow.
Understanding and tracking margins is critical to profitability of the business. A business can earn great gross margins on a product or service but end up losing money due to lack of indirect cost controls. Each business is different, therefore, understanding what drives and erodes margin is key. Take the time to understand the metrics you should be tracking for your particular type of business. Seek the help of professionals if needed.
The typical answer for most business owners to grow their business is to just get more sales. While growing sales is critical to business growth, if the back end (Operations & Delivery) is not properly optimized, then any gains will be lost on maintaining an inefficient operations model.
Analyzing your Quote 2 Cash process will allow your company to uncover waste and inefficiency. Depending on the type of business, this inefficiency can be in the sales and quoting process, delivery process, collection’s process and many other areas.
This is especially true with a complex business model that has a high number of interdependencies. The more complex the sale and delivery of your product or service, the more potential there is for waste and inefficiency.
Every important decision a business owner makes, especially when affecting the business model, should be soberly reviewed against accurate numbers and solid projections.
Most businesses are started from a dream or a passion. Sadly, a large number of business fail simply because they do not understand the numbers and make key decisions blind. When you tie the dream to sound financial understanding and governance, the sky is the limit.
“Do you know your numbers? Knowing your numbers starts with knowing and understanding how the numbers are generated”.