For your business numbers to tell you about the state of your business, you first have to take the time to look at them and therein lies the first hurdle for most business owners.
They fear what the numbers might say or know that they won’t understand them or have a mindset that they’re not good at maths and as a result, they bury their heads in the sand and/or abdicate all responsibility to their bookkeeper or accountant. None of these actions will help your business to survive let alone thrive.
I was talking to UK business leadership coach, Andrew Priestley, about how important the numbers are in business and his experience with clients who don’t know the basic numbers. It’s disappointing to me that so little is available to help redress this issue and the reason that I continue to write these blog posts. The more knowledge I share, the more I am helping people to overcome the knowledge gap that is vital for business success.
THERE ARE EFFECTIVELY THREE KEY NUMBERS THAT NEED TO BE LOOKED AT IN CONJUNCTION WITH EACH OTHER IN ORDER TO DETERMINE THE HEALTH OF A BUSINESS, THEY ARE:
1. Revenue (also called Income and Turnover).
Delving into this number on a monthly basis will identify trends, identify the slow months through the year, whether the income is trending up or down, or whether the income is volatile, up one month, down the next.
2. Net profit.
This is the amount of money you’ve made after paying all the expenses of the business. Even if the revenue is increasing, it doesn’t necessarily mean that the net profit is increasing. What can happen is increased revenue requires increased costs that are more than the revenue and thus less net profit.
3. Total expenses, including the cost of sales and overhead expenses.
Accountants in bigger companies have a reputation for cutting back on expenses, chopping staff numbers, eliminating all non-essential costs. Whilst bigger companies often have costs that are superfluous that can be eliminated without affecting the business, reducing expenses for the sake of creating more net profit in itself is not a sustainable process for the long-term success of the business.
Whilst the revenue of the business is often the number that business owners focus on, it doesn’t give a true picture of how the business is trading. Growth for the sake of growth doesn’t always create more profit unless you keep a careful eye on the expenses and ensure that the additional costs aren’t greater than the increased revenue.
With increased revenue, often there is the need to increase the staff numbers. Having systems and procedures in place is imperative to ensure that new team members know how to do the work and come up to speed quickly and easily.
I have this same issue. When I do the work myself, let’s say a particular job takes me four hours. I find that a staff member may take six or eight hours to do the same job and I haven’t factored that increased time in the quote for the revenue. Now whilst their salary may be less than mine, it still isn’t the financial result I’m expecting. What happens if this is multiplied over all the jobs the team are doing? They are taking longer than I quoted, and thus I find myself making less profit.
Focusing on the productivity of the team, by providing them with systems and procedures, ensuring they understand them; providing time budgets and monitoring systems will help to improve the position.
In summary, take the time to become knowledgeable about your numbers and regularly review and interrogate them to find out what is happening within your business. Early identification of an issue means you can take steps to fix the problem and not have it continue on and on.