What does it mean to “know your business’ numbers”?
To be successful in business you need to know your numbers. This is often repeated by bookkeepers and accountants to business owners. But the thing is, it is true. The business owners who are the most successful are those who know their numbers very well and use them regularly to make decisions.
So what exactly does it mean to “know your numbers”? Well, this will often differ from business to business. It will also depend on your business goals. However, at the very least you should know these 3 vital signs of your business.
1. Profit and loss
Profit and loss are vital for you to know. It tells you each month if you are winning or losing. This makes it an important figure to have in your mind. Not only is it a great driver for some business owners, but it also gives you information on whether any changes made or investments are working or are worth the cost. Remember income minus expenses equals your profit or loss.
2. Your balance sheet
Your balance sheet acts as a snapshot of where your business is sitting today. There are three major elements of a balance sheet that are integral to each other.
First up is your assets. Here you can see the total amount of what you own or what is owed to you. This could be things like the inventory you have purchased, cash in the bank, unpaid invoices, and more.
Secondly, is your liabilities. These detail what you owe to others. Often they are things like bank loans, unpaid invoices to others, or unpaid taxes. This is an important one to keep an eye on.
Bringing all of these together is the final element, equity. To get your equity you add up all your assets and then subtract your liabilities. Equity is often looked at as the net worth of the business. So, if you were to cash in all your assets and pay off your debts, equity is what you would be left with. It is important to keep an eye on these numbers to ensure your liabilities aren’t getting too far out of control.
Cashflow is an extremely important metric which you should always keep an eye on. One of the biggest reasons businesses struggle or fail is because of poor cashflow. Cash determines a large portion of your business. While you may have a great idea, if you can’t afford to market it, or pay staff, or pay off debts, then you are going to struggle.
Another major part of your cashflow is it often determines how much your business can grow. When growing you will need to invest a significant portion of your cashflow in order to build your resources and reach more customers. So, it is important that you know where your cashflow is sitting in order to know when the best time to grow is. It will also give you a heads up as to when you are heading towards trouble, allowing you to pivot and steer clear.
Accounting software like Xero can help you see your cashflow and real time and can provide forecasts to help you see how your business should progress in the future. Ultimately, this gives you the data you need to make decisions in your business, like when to start a marketing campaign, or whether to hire a new team member.
Every business will have a unique set of numbers they may need to look at. This is dependant on the industry, products sold, where they are sold, and more.
For example, an online store may focus a lot on metrics surround cost per conversion, website visitors, or the rate of repeat customers. Other businesses in a brick and mortar store may look more at staff wages costs to determine what is the most profitable amount of staff to have at any one time. Cafés may look into the price of ingredients and how they are fluctuating, as this could affect the revenue they make from each sale.
Knowing your numbers starts with great bookkeeping. Unfortunately, many business owners find they do not have the time to complete all the bookkeeping tasks required, so the books pile up. This is where a professional bookkeeper comes in. They can use their skills to complete your bookkeeping. Then both you and your bookkeeper can access your numbers in real time using Xero, to collaborate together, and provide accurate data.
If you are looking for a bookkeeper, reach out to Link Books.