I often get asked, “What numbers should I be looking at?” My answer is always all of them, but for some that’s just too much. And dependent on your industry the answer can also differ.
But really there is a first step that business owners need to make – and that is understanding the story behind your numbers. Okay, stay with me here. It’s not super boring; it can actually be enlightening.
Here’s where we will start. We will look at the “how much”, the “what” they are made up of and the “why” of the numbers.
Your financial reports will give you the information you need for the first part of the equation – the “HOW MUCH”.
How much are your revenue, expenses, assets, liabilities and equity amounts? You will find the answer to this in your profit and loss and balance sheet reports. Have I lost you? Ask your bookkeeper to print them out for you. (If you’ve never really looked at these reports and are READY and willing to see the report card for your business, contact us at email@example.com)
These reports may look mystifying, but really they show you whether you’ve made a profit or a loss and your balance sheet shows the net wealth of the business (including that profit and loss). And yes sometimes this figure is negative if you are too heavily geared with debt and your assets aren’t producing enough return on their investment.
The next part of the equation is “WHAT” – what are these figures made up of? In other words, what’s the detail behind them? If you have revenue of $10,000 what transactions occurred to arrive at that amount?
The final part of the equation is “WHY” – why did these transactions occur? The answer here provides the drivers for the business. In the example of the revenue, perhaps it was 50% product related and 50% service related revenue. The product related revenue transactions may have involved products X and Z. Product X has just been introduced to the market and the majority of sales have come from the initial product launch. Upon further investigation you discover the majority of those sales occurred through one main affiliate (or distributor, retailer etc). Not only would it be useful to determine “why” this affiliate did perform better than others, but the reason could be shared as part of your selling process and with other affiliates (distributors, retailers etc).
Perhaps the service business revenue related to normal monthly retainers for clientele, but compared to last month there was an increase? Is this an increase for a particular client? Or have new clients been brought on board? And if so, where did they come from, how did they find you? This is the “why” of how these transactions occurred.
If we look at expenses briefly, the same principles apply – how much, what and why?
How much are each of your expenses, what are they made up of and why have they occurred? Perhaps you investigated the transactions that occurred for your telephones. You discover three bills occurring each month. You know there should be two. Oh dear, there is a phone line that hasn’t been cancelled and you are still paying for it! Don’t laugh; I’ve seen it happen many a time. Or perhaps you’ve never been bothered to scrutinise your bill. You discover overcharging. Again, this happens all the time.
Perhaps upon looking at the subcontractors detail in your Cost of Sales area, you see that in fact the margin between what you have paid your subcontractors, compared to the actual revenue they have brought in is low. This shows you that your subcontractors are either not efficient in their work, you haven’t charged for all associated work and/or you are not charging enough to cover not only their costs, but the other associated costs of having this business model. This could be providing an office environment, equipment, software for communication, telephones etc.
If you were to look at a balance sheet report just for the month, this would show you the movement in assets, liabilities and equity accounts. This can explain how you are funding and investing in your business. Perhaps you bought a new computer and had a great month sales wise, but really struggled to pay your bills. You would probably see an increase in the assets for the computer equipment, an increase in debtors (the people that owe you money) but your bank account has remained stable. On the other side of the equation, you may see your creditors (people you owe money to) increase along with your credit card balance as you have used this to fund purchases and your equity (your investment in the business) may remain stable.
You see, all your financial reports can tell a story about one component of your business, but it’s important to look at them all to get a complete picture of the how much, what and why for your numbers.
Here’s your homework:
Look at your numbers; don’t hide from them. If they scare you to death, get help. We can help you learn about them and put some monitoring strategies in place to keep on top of them. After all, it’s best to be armed with the correct data to be able to make the best business decisions and plan for the future, secure in the knowledge that you are fully aware of what has happened in the past and learn from any mistakes.
If you do require support please email firstname.lastname@example.org set up a 15-minute strategy session to see if we can help you get on the right track to sustainable profits in your business.