Knowing the Numbers of Your Business
You’re a small or medium-sized business owner. You take pride in knowing everything you should about your market, customers, and product performance. Your accountant assures you that, based on past performance, you should continue to bring in a tidy profit, pay your taxes, and maintain a healthy cash flow this year.
However, you’re aware that sometimes those warm and fuzzy feelings are no match to the cold, hard numbers that affect the true value of your business. You’re not an accountant, but you don’t need bookkeeping skills to realize that when it comes time for you to sell your business or lure investors into expanding—or simply to maintain your business’s current health–there are relevant financials you need to know.
At Quantive, we have found that owners often vastly overestimate the value of their company. As an owner, you may not actually have a deep understanding of the numbers involved.
Why you should know your numbers
Knowing those numbers can make your business run more profitably and ensure its survivability beyond the 5-year mark that, according to the Small Business Administration, only about 50% of small businesses reach.
Awareness of those numbers can also help you focus your problem-solving skills to plug expensive leaks, especially when revenue fails to match those projections. Conversely, those same numbers will be a flashing beacon for those products or services where the profit margins are high and provide opportunities for reallocating resources.
What Numbers You Should Know
Julie Bawden-Davis, a widely published journalist and blogger specializing in business, has written 12 books and more than 3,000 articles. Writing for the American Express site, she highlights the seven financial numbers every business owner has to know.
She writes, “While it might not be your favorite post-work activity, it’s important to keep a close eye on the critical numbers that can help you predict the success of your business.”
Briefly summarized, those numbers are as follows:
1. Cash Flow
This is the term for how much—i.e., the net amount of—cash (and cash equivalents) is coming in and out of your business. See our discussion of the cash flow statement below.
2. Net Income
Subtract all your expenses, including taxes from income generated by sales and services, and you get your net profit. Your expenses are costs of goods you sell, operating and administrative expenses, interest on loans, taxes, and other costs. This is a reliable indicator of whether you’re earning, losing money, or breaking even.
3. Profit and Loss
Ask to see your P&L statement, and you’ll find a snapshot of income from sales and revenues fewer expenses over a specific period of time. The time periods can be yearly, every six months, or quarterly. That snapshot in time can be a reliable predictor for future or seasonal performance and plans.
Obviously, generating sales is what you’re in business to do. This number needs to be tracked in real-time so that trends—both upward and downward spikes—can be translated to actions to keep the good times rolling or staunch the bleeding.
5. Price Point
To remain competitive, your services and products must compete in a marketplace to attract consumers as well as generate profit. Knowing exactly how much it costs to provide those goods or services is both a function of knowing your numbers and the gut feelings that come from experience. Knowing the best price point based on the numbers and knowledge keeps you in the game.
6. Gross margin (or gross profit)
Related to the price point, gross margin is how much money is left over after the cost of the merchandise is subtracted from the selling price. If the resulting number does not cover operating costs—salaries, rent, utilities, etc.—you are not charging enough.
7. Total inventory
A quick weekly check of inventory numbers will help you:
- spot a gradual or creeping increase of inventory, which could be a sign of flagging sales and a need for remedial action
- avoid excesses in inventory and resulting storage costs, waste, and reduced profits
You don’t have to be an accountant…
You only have to understand what to look for and how the accounting reports point the way to the actual value of your business. There are three financial statements you need to know about in order to keep your business numbers at the forefront of your attention.
You need to review and focus on the following standard accounting reports that provide the numbers discussed above:
1. The Balance Sheet
This report is a summary of your assets, liabilities, and equity. The balance sheet provides the point-in-time snapshot of your company’s financial performance discussed above.
Assets are everything from cash to property, as well as receivables or trademarks. Liabilities, on the other hand, are obligations, debts, loans, and money owed to vendors, along with wages and interest owed. Equity would be the money value returned to you and your stockholders if you closed down and sold everything.
2. The Cash Flow Statement
You can analyze cash flow using a cash flow statement. The report has three sections:
- Section 1. the cash flow from business operations—all the cash generated from business operations.
- Section 2. cash flow from investments—both gains and losses
- Section 3. cash flow from financing—an overview of cash generated through debt and equity
3. Your Income Statement
The income statement summarizes your revenue and subtracts the cost of the goods sold. The result is the net profit discussed above. The statement can be tracked over time to help you evaluate where you can grow revenue or increase profits by reducing expenses.
How Quantive Can Help
So, knowing your numbers is knowing the real value of your business. Whether planning on retiring soon or anticipating a merger, Quantive can help you gather the data you need you to need for a formal business valuation.
Contact Quantive. For a single fee, we will provide a comprehensive business valuation, which will be your launching point for either an exit strategy, acquisition, or simply a stronger foundation for knowing and tracking your business numbers.