The 5 Numbers Every Business Owner Should Understand
You don't need to be an accountant to understand your business finances. In fact, we'd argue that you shouldn't have to be. You might have an accountant who prepares your accounts, but you're the person running the business. You need to have a reasonable idea of what's going on with the money.
That doesn't mean knowing every accounting term or spending your evenings looking at spreadsheets, it just means knowing the numbers that actually tell you how the business is doing.
Here are five worth keeping an eye on.
1. Turnover
This is the obvious one. Turnover is the money your business brings in from selling its products or services, before costs are taken off.
It's a useful number, but don't get too excited just because it's going up. A business turning over £1 million isn't necessarily doing better than one turning over £500,000. What matters is what you're actually keeping.
2. Gross profit
Gross profit shows what's left after the direct costs of producing whatever you're selling.
It's particularly useful because it tells you something about the underlying profitability of your work. If your turnover is increasing but your gross profit margin is falling, that's something you want to know about.
It could mean your costs have increased, your prices aren't keeping up, or you're doing more work for less return.
More sales don't automatically mean more profit.
You might have an accountant who prepares your accounts, but you're the person running the business. You need to have a reasonable idea of what's going on with the money.
3. Net profit
This is the figure most business owners are interested in. Net profit is what's left after your business costs have been taken into account. It's a much better indication of how the business is actually performing than turnover alone.
But there's another important question: What happened to that profit?
After all, a business can be profitable and still have very little cash in the bank.
4. Cash in the bank
This one sounds obvious, but it's easy to overlook. You can have a profitable business and still find yourself worrying about whether there's enough money available to pay the bills.
Perhaps customers haven't paid yet, you've got a large tax bill coming up, or you've invested in equipment or taken on extra staff. Profit and cash aren't the same thing.
That's why keeping an eye on cash flow is so important, particularly when your business is growing.
5. Tax
We wouldn't recommend waiting until your tax bill arrives before thinking about tax. You should have a reasonable idea of what you're likely to owe and when you're going to need to pay it.
That makes a difference to your cash flow and gives you time to consider your options so you aren't caught out by a bill you weren't expecting.
Knowing the numbers is only half the job when it comes to your business finances
You don't need to become an accountant, but you should understand enough about your figures to know when something doesn't look right:
If your turnover is increasing but your profits aren't, that's worth investigating
If your profits look healthy but there's never much cash in the bank, that's worth investigating too
If your tax bill is regularly a surprise, it might be time to look at how you're planning for it
At Culverhouse & Co, we don't believe in simply sending you a set of accounts and leaving you to work out what they mean. We want to talk about the numbers with you because the figures are there for a reason, and that's to help you run the business.
Comments