If you do NOTHING else with your business financials, get these three key numbers every month to help you gain clarity, confidence and control of the financial position of your business. Before i get to that though, here are two notes of caution:
- Some of the terms do sound a little complicated, but fear not, I’ve explained them in simple terms too.
- Remember Structure follows Strategy. (not the other way around!) When planning improvements in your business, evidence based decisions should inform your Business strategy, which in turn will guide you in what you need to do and how you need to do it, to achieve your goals.
1. Year to Date Net Profit Variance
Yes, it is a bit of a mouthful, but let me break it down…. This is the difference between
- How much money you have actually made (after all of your expenses) so far this financial year and
- How much you expected to be making (after all of your expenses) by this time of the year.
If it’s a positive number, you’re exceeding expectations, if negative, well perhaps you have some work to do or you need to re-work your expectations.
Why it’s Important to know;
In a regular job, it’s a pretty safe bet that you know roughly what your annual salary is going to be. You can break it down into regular payments and arrange to pay your bills. Now imagine if you check your payslip and you’ve been short paid? Worse, imagine you haven’t checked it for six months but all of a sudden you don’t have any money to pay your bills. You take a look at your pay slip and realise they’ve been docking your pay $100 a week and you didn’t even know about it?
Well it’s the same in business! We all go into business with an expectation of what we will earn. Sure some of it might be wishful thinking, but everyone has a bare minimum. (or else why are we doing it?) By looking at this number regularly, you have a business barometer, much like a GPS in your car, that tells you if you are on track or not. If you’re not, you will be able to drill down into the other expectations of income and expenses and see exactly where things are going wrong and what you need to do to get back on track.
2. Bank Balance Projections Over the Next Three Months
A good cashflow projection will take into consideration:
- What you expect to actually get into your bank account from sales (not the sale, but the cash deposit) and
- What you actually have to pay out in expenses. (not incurring the cost, but when you have to actually pay it)
- Items that wouldn’t usually appear on your Profit and Loss Statement such as
- GST
- Superannuation
- PAYG Tax
- Income Tax Payments
- Loan payments etc.
Why it’s Important to know;
Newsflash, if we aren’t going to be able to pay our bills in three months, it might do us some good to know about it now, so that we can take some action to try to sort it out. It may sometimes be a scary number, but knowledge is power and it’s better than lying awake at night worrying about it. Conversely, if we are totally cashed up, we might be wanting to put some of it aside in an interest baring deposit, take a holiday, buy a car or whatever. Either way, it puts us in control of our future and won’t leave us caught short.
3. YTD Gross Profit Margin by Product/Service
Not all revenue is the same! Sometimes it will cost you seventy five cents to make a dollar, other times it will cost you ten cents. Unfortunately and I see this too often, sometimes it costs you two dollars to make a dollar!
If you’ve got multiple products and Services, Gross Profit Margin will tell you how efficiently you are using your resources to make the money in your business. The costs in the calculation usually reflect the costs that go up and down in relation to your sales. Ie. If you are a Tiler, the more tiling jobs you have, the higher your tiling wages will become. However if a new tiler isn’t very productive it will show in your gross profit margin.
Gross Profit Margin will give you a clear picture on what it costs you to earn your money across the different products and services you sell.
Why it’s Important to know;
I think of this number like fuel efficiency in my car. If it’s always cost me 65 litres of fuel to travel 650 kms, my fuel efficiency is 10 litres for every 100kms. If that all of a sudden starts to change and only gets me 400 kms, then it’s a red flag that my car may be not running as well as it should, or perhaps I’m doing more city miles.
So it is with Gross Profit Margin by Product/Service. It’s a barometer that you monitor from month to month to make sure it’s within an acceptable range. If it starts to drop, then it’s an indicator that you might be overspending on the direct costs related to bringing in the income. Eg. Wages, advertising costs not bringing in expected sales etc. As with the fuel economy example, it’s a red flag to dig a little deeper into what might be going wrong.
How do I get these numbers?
Well the information is relatively easy to obtain, if you have put the work in to make sure it is accurate. You can obtain it from your general accounting software or from some add-on software. Tools you will need include:
- A well thought out realistic and regularly updated budget. This is your business roadmap.
- Accurate and up to date transaction data
- A reconciled bank account
- Cashflow and reporting software is a big help (there are many out there, but I use Calxa, which is fantastic)
You can take the DIY approach and comb through your numbers yourself, although in all seriousness I think this can take your eye off the ball of running your business. You don’t need to calculate it all yourself, you just need the results.
You could find a highly skilled Bookkeeper, although often their focus is on compliance with tax and GST rather than the internal management of your business.
Or, you could use a Vritual CFO such as myself, to collate the information and present it to you in an easy to understand format.
There are many other numbers that will help drive your profits and get you focussed, but you need to start somewhere and these are as good a place as any. They will put you well on your way to making evidence-based decisions. Believe me your business will thank you for it!
In God We Trust, everyone else bring data!
