It has been said that in business, 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? Below, we’ve put together a quick guide on how business drivers work together, and how this affects you and your profit.
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.
When looking at money coming in, you need to consider what are factors you can measure. These could be:
– Units sold
– Amount invoiced
– Money coming into the bank
– Number of customers
– Average spend
Next, it pays to work out which is the most meaningful number for you, or which has the biggest impact on the wellbeing of your business.
– 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
Don’t worry if you can’t work out how to calculate the number, just identify it and then ask our Support team for help.
Money Out Part One: Direct Costs
In most businesses, there are two main types of cost. The first type is a direct cost, which is 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 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 with direct 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. Because it is that gross profit that will pay to cover your…
Money Out Part Two: Indirect Costs
These are the costs that aren’t directly linked to each thing you sell, and are often known as overheads. Things like your rent, electricity and cost to pay wages for office staff. Your indirect costs are usually pretty static from year to year, unless you make a significant change to your business. The aim is to sell enough of your product/service to produce enough gross margin to cover these indirect costs/overheads, and then have some money left over to pay yourself.
At Beany we recommend preparing a budget to give you a clear picture of what you want to achieve, and how you’re going to get there. Chat to our friendly Support team if you’d like to know more or get some assistance with this.
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