When times are tough, it pays to know your numbers. But what does that mean?
“The Numbers” are the critical drivers of your business. The pieces of information which can make or break you, particularly when times are difficult.
It is hard to identify them as every business is different and even if you have the theoretical knowledge, how do you actually get those numbers out of your accounting system in a way that is easy, regular and accurate?
What are My Drivers?
First things first.
This is called all sorts of things, turnover, sales, revenue or income, It’s all the same. There can be a difference in when it comes in, but it is usually about how much stuff you are selling. If you sell a beer, you get paid immediately. If you are building a house, the money typically comes in in chunks through the project. Debtors can pay on the 20th of the month following.
1. What is important to you? You can measure:
1. Units Sold
2. Amount Invoiced
3. Money coming into the bank
4. Number of customers
5. Average Spend
2. Work out which is the most meaningful number for you
1. You need this information at least weekly
2. It needs to be easy, preferably automated, to find
3. It needs to be accurate and quick to generate
3. Don’t worry if you can’t work out how to calculate the number, just identify it and ask Beany for help.
Money Out – Part One – Direct Costs
There are two main types of cost. A cost that is directly related to the sale. In other words, you cannot make a sale without this cost and every time you sell something, you have to pay this cost. Examples are the cost of the beer if you own a bar, the materials if you’re a builder or labour if you are selling time.
Direct costs are super important as they are usually a significant part of your business cost and reducing them, even slightly, can make a big difference to your life.
For example, Bob the retailer changed the key supplier of his stock to an equal quality but more competitive supplier which meant he was paying $2 per item instead of $2.50. He sold $500,000 worth of stock each year. His average sale price was $5.
This means he had an extra $50,000 at the end of the year and went to Las Vegas on a huge trip with his 10 best friends, or something similar.
50 cents doesn’t sound like a lot, but indirect costs even a small change can make a big difference.
Money In Less Direct Costs = Gross Profit
Measuring Gross Profit is essential, for most businesses. It’s the amount of money you have left after paying for your direct costs and has to cover everything else, from overheads to your drawings to repaying any debt.
A good way of thinking about gross profit is as a % of your sales figures. The reason why we look at it this way is that then you can measure your progress on improving it irrespective of how much you sell. You can also use this measure to check in against other similar businesses.
Here’s how you calculate it:
1. Go to your Xero file and click on Accounting on the top toolbar and select Profit and Loss.
2. Find the total income line in the Profit and Loss and your total Gross Profit line.
3. Get out your phone calculator and divide the gross profit number by the income number and then multiply by 100 – that gives you your GP%.
Total income = $100,000
Gross Profit = $50,000
50,000/100,000 x 100 = 50 – this is the 50% and is your GP%
Start to measure that every month and see what makes it go up and down. Check it out against your competitors using our Wealthier software.
Overheads are all your other business costs – sometimes known as the ‘cost of opening the door’. It includes rent, insurance, often wage costs, power, office costs, really everything else.
Net profit is what’s left after you’ve paid your overheads and should be, more or less, what you have in the bank to pay yourself (drawings), buy assets such as vehicles or to pay down debt.
This is the amount that your tax is calculated on (not your drawings, or what you take from the company). It is the ultimate measure of success or failure for any business owner. It can also be calculated as a % and used as a way of measuring yourself against other businesses.
Knowing your numbers is more important when times are tough than when times are good so this is an excellent time to learn how to ‘read’ your profit and loss.
If you want more information on your KPI’s, reach out to email@example.com