WITH better accounting systems and management information these days, it’s easy to be bombarded with loads of numbers and data about your business, without really appreciating what are the most important numbers to keep track of to make sure your business is thriving, not just surviving financially.
For business owners there are six key numbers that will enable you to keep a clear focus on what really matters. Understanding them is important and improving them will create success.
Sales revenue
Sales revenues are the lifeblood of any business. You should be comparing each month how you have done versus last year, your budget, any revised sales forecast and how this compares to your break-even point.
If yours is a fast-moving business, the more regularly you report sales revenue the better. Weekly and daily reporting should be adopted where possible.
Break-even
Break-even is the level of sales you need to achieve so that you are not losing money. Running a business at a loss for a sustained period is just not tenable.
Break-even is calculated when you split your cost structure into fixed and variable costs. Fixed costs typically include things such as cost of renting offices, factory or warehouse space, the cost of employing staff or anything that you can’t vary in the short term. Variable costs vary with sales. Typical examples are distribution costs, costs of product sold, any labour costs related to production; in fact all costs that vary as sales go up or down.
Getting your break-even point as low as possible will give your business more flexibility.
Gross margin
The gross margin measures sales less the variable costs of producing these sales. The absolute level of money is important to monitor, but the percentage gross margin is key. The higher you can get this the better, as it shows the profit benefit for each additional unit of sale made.
For example, if you have a business that generates 40 per cent gross margin, for each additional $1,000 of sales, you should expect an additional $400 of profit to flow directly through to your profit line, as other fixed costs shouldn’t vary very much in the short term.
If the gross margin of your business is only 20 per cent, obviously you have got to sell twice as much to get the same profit effect.
Fixed overhead levels
Monitoring the fixed overhead level is important, as are the ways to always be looking at how you can reduce these levels without harming the ability of your business to serve customers.
Net profits
As most businesses need to make a profit to survive, comparisons to budget, forecast and history and inter-firm comparisons are important, as is comparing your profit to sales percentage and with the funds you have invested in the business.
The higher your profit percentage, the higher return you are making. What you think this should be is vital when it comes to setting targets for your business. Rather than just taking your costs away from what you think sales will be to get a profit the business delivers, try turning this around. Based on appropriate research, decide what you think your profit percentage to sales and funds invested should be, and then consider what you need to do with either your variable cost or fixed overheads to deliver your target profit. You may be surprised to see what this simple change in thinking can deliver.
Cash headroom
There are a number of differences between the profit your business is making and the cash it’s generating, or not, as the case may be. Make sure you understand those differences and keep monitoring your cash position.
Most businesses go bust simply because they run out of cash, particularly growing businesses. The absolute level of cash or overdraft you have is critical, but the ‘headroom’ you have in your funding facilities is the key number to monitor. Headroom is the difference between your cash balances and the maximum borrowing limits you have set up.
Rupen Kotecha is regional director WA at The CFO Centre, which aims to help small and medium sized businesses find tangible value-add solutions to their financial issues.
Contact Rupen on: 1300 447 740 | rupen.kotecha@cfocentre.com. au | www.cfocentre.com.au
