The most successful business owners that we have worked with know their numbers; Full stop. No exceptions. But what exactly is knowing your numbers and what numbers do you really need to know? Sorry to be vague, but it depends.
At an absolute minimum you need to know how to read the 3 vital signs of a business; Your Profit & Loss, Balance Sheet and Cashflow Statement.
Let’s take a very basic overview and these three aspects of your business.
What is a Profit & Loss
Your profit & loss is your scoreboard.
In a nutshell, it tells you if you are winning and losing each month. These are important numbers to be across, as your income minus expenses equals your profit or loss.
And as well all know, Profit = good. Loss = not so good.
What is a Balance Sheet
Your balance sheet is snapshot of where your business at today.
There are three aspects to your balance sheet: Assets, Liabilities & Equity.
Firstly, the balance sheet details your assets. Your assets are the total of what you own or what is owed to you. Think cash in the bank, items or inventory you have purchased & invoices that haven’t been paid to you.
Secondly, it details your liabilities. Liabilities are what you owe to others. Think loans to banks, unpaid taxes and unpaid invoices to others.
Thirdly, if you add up all the asset and subtract all the liabilities, you are left with the equity of the business. Equity can be looked at as the net worth of the business. If you walked away today from your business, sold all your assets and paid all your debts, you’d be left with whatever amount of equity you have.
What is a Cashflow Statement
Your cashflow statement is your crystal ball into the future.
If you have ever heard the saying ‘cash is king’ there is a reason why, because cash is king. Most of time, when businesses get into trouble or fail it’s because they run out of cash. Your idea may be great, and your business may be growing, but if you can’t pay the bills or pay the staff – it’s all over.
Growing your business will inevitably put strain on your cashflow. To grow you will likely have to invest in marketing, more staff and further resources. That’s why understanding your growth rates and accurately forecasting your cashflow is crucial. Successful forecasting should tell you a clear picture of what lays ahead and when it’s safe to invest for growth. To do this, you must utilise online accounting.
These numbers are the common scoreboard for every business. They do tell most the story, but not all of it. Every business has specific numbers that are the key drivers of growth and profit, and these must be measured.
Take a café for example. The owner of a café must monitor the cost of the goods purchased & the selling price of their menu items, as one is directly affected by the other. These costs evidently determine the gross profit margins of the business. A café owner also must consider the cost of their wait staff; what’s the cost of wages every hour the café is open? What’s the most profitable combination of staff to have on for each day of the week?
These are very different numbers to that of an online business. An online business should likely be measuring the cost to acquire a customer, unique visitors to their website, the churn rate of their customers and so on.
So, what are your most important numbers to measure? Like I said, it depends. If you don’t know what you should be measuring, how do you know what success looks like, and furthermore, how do you improve?