6 numbers every business owner needs at their fingertips
What are the key metrics you should know without thinking? We name six things every small business owner should track constantly
When it comes to cash, businesses essentially do two things – they spend it and they earn it. As we know, the difference between the two – assuming earnings exceed expenditure – creates the profit.
But the relationship isn't quite that simple.
In calendar terms, the outgoings of a business – people costs, heat, light, raw materials etc. – don't necessarily synch with money coming in from customers. And if the costs add up to more than the money coming in during a particular period the result can be an acute and potentially crippling cash shortfall.
As a business finds its feet, it's tempting to focus on the sales and profitability numbers but successful managers focus on a broad range of metrics
Businesses can fall into the trap of looking at a very narrow set of numbers – for example seeing money in the bank as a sign that the business is performing well, without thinking about costs and outgoings.
Here are six key metrics you should have at your fingertips.
1. Sales volumes and value
Let's look first at what the business is earning, the starting point for that being sales. There are a number of ways to look at sales. For instance, the sales volume will tell you exactly how many units of a particular item you are selling over a given period.
This doesn't give you a cash figure but volume figures provide an easy to understand means to track performance over a period. In simple terms, if you sell 300 units in May and 400 in June, you know that sales are rising.
However, that's by no means the only important sales metric. Sales value is measured by multiplying the volume of sales by the selling price to come to an overall figure for value. By this measure, you might find sales have risen to £5,000 from £4,000 over a month.
But both those figures can be deceptive. A rise in volumes might disguise discounting to boost the figure. A rising value figure may not be due to higher volumes. It could in fact be down to rising costs pushing up the selling price.
So you also need to understand the profit margins associated with the sales. There are a number of ways to measure this, including ‘gross’ and ‘net' profit.
Gross profit can be worked out simply by subtracting the cost of sale – i.e. what a particular product cost you to make or prepare – from the sale price. So if your café sells a cup of coffee for £2.20 and the raw materials (milk, coffee etc.) cost 50 pence, you have a gross profit of £1.70 on the unit. Net profit is more difficult to work out as it involves factoring in all costs, including your employees’ salaries, rent, heat, light, other utilities, and taxes. It can be easy to get carried away with rising sales figures and even easier to see soaring gross profit as success.
How each of these three numbers relates to the others is important. Look at them as distinct figures to measure your rate of progress and include them all when creating your financial forecast.
3. Understanding costs
This is where another set of metrics kick in, namely the whole range of costs that you incur, day by day, month by month, and year by year. Broadly speaking these break down into fixed costs such as rent (that remain the same regardless of how much work the company is doing) and variable costs that rise as you ramp up production or sales.
This second group includes the cost of buying in goods (which rises if you need to plan to sell more), raw materials and possibly wages, if more employees are needed or if overtime is required.
These costs have an impact on the company in two ways. First of all they affect profitability but they also have an impact on cashflow. This is particularly true of variable costs, which typically rise (as you increase your stock inventory or take on more employees) well ahead of the company selling to the customer and receiving payment.
It's therefore vital to be aware of all outgoings on a month by month basis. The key figures include:
- People costs. Not just the salaries paid but also employers’ tax and National Insurance.
- Rent, utilities, business rates, and when they fall due.
- Supplier costs, such as raw materials, products for resale, hire of machines or software services rentals.
- Marketing spend. Advertising, website creation and maintenance, email marketing, etc.
- Loan repayments. The money you owe your bank, lessor, or another lender.
4. Monthly revenues
All these outgoings have to be paid for and while you can buy time by running up the company’s bank overdraft during quiet periods or by falling back on your cash reserves, ideally you should be earning enough every month to cover outgoings as they come up.
That's why monthly revenues are also a hugely important metric. Average revenues from recent trade – as well as real-time figures – provide a snapshot of where you are at the moment and what you can expect in coming months.
This is obviously easier when you have at least a full-year’s trading behind you and can see the likely seasonality of your sales to predict year-on-year rises or falls in line with past performance.
You should also be planning ahead by projecting revenues for upcoming months by calculating sales made against the dates when customers are expected to pay. If you use invoice finance, whereby you receive an advance of an outstanding invoice from a lender in return for paying a fee on that sum, this will make predicting somewhat easier. You can also make estimates for the future based on expected sales in the pipeline.
5. Money in the bank
Of course, at the centre of all this is the money that you have in the bank. It’s vital to have a bookkeeping package that gives you a view of your bank balance and shows you the upward and downward trends of how much you have in the bank at different times of the month, quarter or year.
6. Stock inventory
Not all businesses require much by way of stock inventory but for those that do, careful management can be a way to keep down costs while ensuring you have what you need. The key is to track inventory as sales are made, enabling you to order when you need to without getting too far ahead and thus spending more than required upfront.
Managing an early stage business begs two equally important questions. Am I trading profitably and can I pay the bills? By using accounting software to track the key metrics you can ensure you always have the answers at your fingertips.
This article was produced in association with online business software specialists Sage as part of a series of features on start-up essentials.