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:
– Units Sold
– Amount Invoiced
– Money coming into the bank
– Number of customers
– Average Spend
2. Work out which is the most meaningful number for you
– You need this information at least weekly
– It needs to be easy, preferably automated, to find
– 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. 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 his 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 absolutely essential, for most businesses.