Hello there, how’s your month going?
Sales going well?
How are they compared to last month, or this time last year?
If you’re like a lot of small business owners, it’s likely that you don’t know the answer to this.
If you’ve ever watched Dragon’s Den you’ll know that hopefuls often come unstuck in their knowledge of the financials. “Know your numbers” is something a lot of small business owners are told right from the beginning, but what numbers should you actually be keeping an eye on?
Gross and operating profit margins
How efficiently are you producing your product or service? The gross profit margin shows the percentage of your revenue that is left once you’ve deducted the direct costs of those sales (for example wood if your business makes chairs). Generally speaking the higher this number is the better, and ideally you’d also compare it to the industry standard.
Similar to the gross profit margin, the operating profit margin looks at the percentage of revenue left once all operating costs, such as administration and office costs, have been deducted.
Falling margins may be due to increased costs, a decrease in sales, or perhaps a reduction in selling price.
For most businesses this will be the main source of income, so it’s important to keep a close eye on whether your sales are going up or down. An ice cream salesman would expect low sales in December, but if they’re low in the middle of a heatwave that would suggest a problem that needs to be looked at.
It’s not just if sales are lower than expected, identifying an increase in sales is just as important. Do you know why they’ve improved, are you able to sustain this, do you need to recruit more staff?
Cost of producing a widget/offering a service
Do you know how much it costs you to make your product or provide your service? If not then you can’t be certain that your price is covering this cost, which is a surefire way of not making a profit!
Quick ratio, sometimes called the Acid test
Often used by banks when considering loan applications, the quick ratio reflects a business’s ability to pay their current liabilities, and is an indication of financial stability. It does this by dividing your current assets (so cash, cash equivalents, account receivables, but minus stock) by your current liabilities, with the resulting ratio being how many times the liabilities can be covered by the assets.
There’s no one perfect figure, and a service-based business will have a lower number than one in manufacturing, but for most industries you want it to be greater than 1.
Knowing these numbers, and tracking whether they rise or fall, will help you to discover problems before it’s too late. But don’t just use your numbers to look at what needs fixing, let them help you pinpoint what’s working well and then do more of that!
The Number Ninja - Owner and bookkeeper
I love numbers and want every business owner to love them too! By taking away the jargon I hope to also take away the fear and confusion surrounding accounts.