Why Every Business Owner Needs To Understand The Numbers
As the CEO of your business, you don’t need to be an accountant, but you still need to understand the key numbers in your business, whether you want it to sustain your lifestyle, grow your business or scale it.
A lot of business owners shy away from this side of their business. They feel stressed out or anxious when tackling their business finances and would rather just ignore it. I’m sorry to say that you will never grow your business or create a business that truly sustains your dream life, if you are in this group. Every business owner needs to get comfortable talking about their business finances, reading their financial measures and asking questions around this area of their business.
Money is a tool for both your business and your life. Taking control of it and having a plan for how to use it, will open up new opportunities and choices for you and your business.
So, you may not be an accountant, you might not even like accountants, but there are a number of reasons why having a certain level of knowledge around your business finances will make you a stronger business owner.
Decision making
Having access to up to date and accurate financial information means that you are making decisions based on fact rather than guess work. This will lead to more informed, effective decisions that can only benefit your business. For example, can the business afford to hire an administrator on a part time basis to help with the workload?
Understanding what’s working and what’s not
If you have access to up to date information on your income and your expenses, you will quickly start to see what areas of your business are working and what are not. Do you have large Facebook ad spend but little sales to show for it? Are you spending time on client work that could be outsourced to a team member that costs less, while maintaining the same level of service? Have you received any referrals through that expensive networking membership you pay for each year? These are the sorts of questions you’ll start to ask yourself when you are reviewing your income and expenses on a regular basis.
Focus and energy
We all know that running a business is time consuming, stressful and exciting all at the same time. And that takes energy! So, we want to make sure that every bit of energy we put into our business is having a positive effect and is not going to waste. How does a knowledge of your financial information help with this? It gives you a guide on what areas of your business to focus your attention and energy on.
A simple review of the income streams in your business can tell you where your energy is best spent. For example, you might be paying a freelancer to complete client work but when you look at the costs compared to the income its generating, you are not making as much profit as you should. Do you need to spend some time with your freelancer to determine where their time is spent? Do they have standard operating procedures on how to complete their work to your standard? Do they need additional support or training? These are the sorts of things that don’t necessarily relate directly to financial measures, but you can arrive at by using your financial information as a starting point or guide.
What financial information should you be looking at in your business?
This is a question I get asked all the time! Where do you start? I’ve listed below a few key numbers that I think all business owners should know for their business, regardless of their size:
Cash coming into the business and cash going out of the business
You should know what incomings and outgoings you are expecting in your business each month. While of course you can’t know this exactly, you should start the month with a good idea of what your average month looks like, what you need to cover expenses and salaries, and how much do you need for your tax allocation. You should monitor your cash position on a daily or weekly basis so you are well aware of any potential shortages before they happen.
Revenue
This is your total income for the period. You should have a monthly target for the income you want to receive, building to your annual revenue target.
Profit margins
You should have a way of calculating your average monthly profit margin (and if you don’t you might want to check out our finance tracker here!) for the business as a whole. This is the level of profit left over in your business after all expenses are met.
Ideally, you should also know your profit margin by income stream. So how much margin are you making on each service offering you have? Is your 1:1 programme more profitable than your online course etc.?
Main costs
Most businesses will monitor their top costs each month and look at these as a percentage of their sales. This will differ for each business but examples include: staff costs, Facebook ad spend, freelancers, tech subscriptions etc.
Cost to acquire a new client
This is an essential measure if you are in the growth phase. How much is it costing you to acquire a new client? This will include any marketing costs, tech costs, cost of your time for discovery calls etc. You want to use this measure as a guide on whether you want to work with a client. It should be built into the decision making process for your sales price.
How do you get access to the information you need?
As a business owner, you need to have timely financial information available, whether you are ready to admit that or not!
If you look after this yourself, or outsource it to a bookkeeper, the foundation to all of this is recording your business transactions on a regular basis. Having a bookkeeping routine and system in place will mean that your information is up to date and accurate whenever you are ready to use it. Having this one thing in place will mean that you are not waiting until the end of the year for your accountant to provide you with annual financial statements which are already out of date at the time you are reviewing them.
What do you need after you have your bookkeeping system in place?
Your business budget
If you’ve looked at my content on Instagram, you will know that I regularly talk about budgets. They are an essential business tool! Start off your year with a realistic budget and you have a roadmap for the year ahead. You can always start one mid year, it’s never too late and you will still reap the rewards whenever you do.
Looking at the measures above, you should be checking them against your monthly average, your prior month and your budgeted figure to get a real picture of where your performance is at and where it is going. You can then make decisions and plan accordingly.
Monthly KPIs
Essential!! These will differ for each business but having 3-5 financial key performance indicators alongside your operational ones will be a game changer for your business.
For example, an online services based business might track the following KPIs each month:
New Client Leads
New Clients signed
Number of testimonials received
Total Revenue for the month
Profit margin on a specific programme
Cost to acquire a new client
Your KPIs should be your high level measures that you look at without fail each month. They should be related to your core offerings and growth plans for the future.
All of this information might feel like overload when you first start looking at it. However, when you break it down into the key steps for your business, you can create a structure around this area of your business that means it supports your business and helps you plan your future service offerings.
With the rapid pace of change in today’s business environment, it’s no longer acceptable to wait until your annual accounts are completed to see how your business is performing. To really have a sustainable business, you need to take ownership of how your business is performing and you can only do this by getting your business finances under control.
If you need help with your ongoing bookkeeping or a financial health check, please feel free to reach out and book a discovery call using the link here!