When you get in your car you need to know how much fuel you have in the tank, right? Otherwise, you could run out before you reach your destination. In business, instead of fuel in the tank, you need to know how much money you have in the bank.
Even the Magic 8 Ball involves numbers. And, an answer equating to “better not tell you now” or “cannot predict now” will not provide you the ability to make solid financial decisions for your company.
As a business owner, your time is filled with a tremendous amount of tasks and responsibilities to keep your business on track. While we know you are tired at the end of your day and the last thing you want to do is deep dive into financial statements, the greatest mistake to make is not knowing your numbers.
Your Business + Numbers = Success
There are 7 all-important financial numbers to keep your eyes on at all times. Knowing what to look for and how to look at it can keep your business in the black. I mean, that’s the goal, right?
Without tracking even a few of these key financial figures, you will be in the dark as to what is being spent, where you can trim, where revenue is coming from. As a result, lowering overhead costs or expenses become next to impossible.
So, let’s start talking about the numbers, why it’s so important, and shed some clarity on what exactly to be looking for in your financials daily.
What Are They Anyway?
ONE: Cash Flow
Operating cash flow offers a bird’s-eye view of the economic state of your business. To arrive at this figure, subtract your operating expenses from the money your company generates during normal business activities. When your cash inflow exceeds your cash outflow, this is a high indicator that you are operating in the black. If the reverse is true, it should raise a red flag and be looked at quickly.
TWO: Net Income
A close contender to cash flow is your net income, also known as net earnings or net profit. It will tell you if you are earning or losing money. To arrive at your net income, simply subtract all of your expenses, including taxes, from your income. Depreciation is not adjusted into this number.
THREE: Profit and Loss
You may have heard this referred to as the P&L statement. The P&L is basically a snapshot of your business – the income (sales and revenue) less expenses in a specific period of time. Most look at their P&L’s either quarterly, every six months, or annually. Knowing your company’s P&L provides you great insight into projecting earnings and making solid realistic plans for the future, in both the short and long term.
Let’s face it, without sales, you don’t have revenue. And, without revenue, you don’t have a business. This is a critical number to watch at all times. As sales can go up or down, by knowing daily what your actuals are with sales, it provides you the upper hand on pivoting when sales are up to capitalize and the reason. Likewise, it maintains total transparency when sales are down. Sustainable growth is seen in this number.
FIVE: Price Point
Whether it’s a commodity or service your business offers, everything you purchase has a price point, or a cost, if you will. Knowing what the cost is, the overhead expenses it takes to produce and deliver – this will enable you to control expenses and profitability accordingly.
SIX: Gross Margin
There is nothing gross about the term. You may have heard it referred to as the Gross Profit as well. As this is related to the price point, this number is a reflection of what is left over after your cost is deducted from the selling price. Be sure this number is sufficient enough to cover your operating costs. If you find it is not, then you are likely not charging enough for your products and services.
SEVEN: Total Inventory
Your Inventory numbers provide you a front row seat to knowing everything about the products you are selling. Monitoring this on a weekly basis ensures that the amount of inventory isn’t gradually increasing, as this could be a sign of sales trouble. As you track this on a regular basis, you will spot concerns proactively and avoid negative effects of excess inventory.
Knowing your financial numbers and watching them on a regular basis not only provides you greater insight, but enables you to project and forecast proactively. Give yourself back precious peace of mind – and a glimpse of what the future holds for your business.
Junction Peak offers resources, knowledge, and direction to guide you through understanding what your financial numbers are telling you. To get started on your path to success, send us a message and we’ll get back to you right away.