In this blog I’m going to tell you what I think are the most important numbers to keep an eye on in your business and why.
1. Cash Flow
How much is coming in less how much is going out. Positive is good, negative is potentially bad and needs looking at.
Even more important is how much is going to come in less how much is going to come out, which is a cash flow forecast.
This is the single most important financial number in your business. It doesn’t take a financial genius to work out that if you spend more than you receive you won’t be around for long.
Cash and profit aren’t the same thing. Remember the old favourite – sales is vanity; profit is sanity but cash is reality.
2. Net profit
Total sales less total expenses. This one is a double-edged sword.
It’s an important measure as it shows an overall picture of what’s gone on over a period of time.
But it can also mislead you because net profit isn’t based on receipts and payments like cash flow is – it’s based on “paper” transactions with no regard as to whether customers will actually pay you.
Many profitable companies have failed due to running out of cash. Having a net profit of £100,000 means nothing if £100,001 of recorded sales never get paid.
Yes, it’s a vanity measure but if you don’t make the sales then you definitely aren’t going to make a profit or improve cash flow.
Keeping a close eye on sales is important, as a dip could be a warning sign of trouble.
Reacting quickly to an increase in sales also allows you to determine what you need to keep doing to sustain that growth.
Sales also has the great advantage of being easy to understand and measure.
4. Gross profit
Some of your costs vary directly with sales. Other costs are relatively fixed no matter the level of sales.
Gross profit is how much money remains after the direct costs are subtracted from the selling price.
It matters because that gross profit is what’s left to cover those fixed costs (also called overheads).
If gross profit is low and not sufficient to cover your overheads (such as salaries, rent, marketing and utilities), then you’re likely not charging enough for your products and services. There’ll also be nothing left for you.
5. Breakeven point
For any period of time (usually we think of months or quarters or years) your business will incur a certain predictable level of overheads (fixed costs).
You need to cover those costs to stay alive as a business.
The sales you need to make to do that (after deducting direct costs) represent the breakeven point – because that’s the point at which you just cover your costs.
It therefore represents the bare minimum level of sales you need to make to survive. That’s a really useful number to keep in your head.
So there you are – my five most important numbers. If you aren’t monitoring them all in a systematic way you may be missing some vital business information.
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.