Do you know your numbers?
In my experience, many small businesses owners have no idea as to how they are performing from day to day, week to week or month to month. Many do not keep, or keep perfunctory, records. They rely upon their bank statements as their guide to how they are doing and at the end of the year they send these of to their accountant, who puts together a set of accounts that tells them if they have made a profit or loss. This can be as much as a year after their year end, and hence two years after the beginning of the year. This is like driving a car over a tricky mountain pass by looking through the rear view mirror.
Can you make informed decisions about your business?
The business owner needs to make decisions every day: should I advertise in this publication? ; should I attend this network meeting?; should I invest in that piece of equipment?; and so on. Often these decisions, because of the lack of information, are taken on the hoof. The business owner is flying by the seat of his pants. In a previous post I talked about the need to keep good accounting records. This is a vital as it is this that produces the raw data that you need. However, if a business owner wants to grow his business profitably, he needs to know the vital statistics about his business. With the knowledge of those key accounting numbers, he will be able to make the decisions affecting the business on an informed basis.
What accounting numbers do you need to know?
So what are the important accounting numbers that business owner needs to know? There are five key numbers that the business owner needs:
- Profit – the old adage “sales are vanity; profit is sanity” is true. Of course the business owner needs to know what their sales turnover is, but much more important is the profit that they are making. At the very least this should be for the last month, but ideally this should be measured weekly.
- Break-even – the business owner needs to know the sales volume necessary for the business to break-even, i.e. the point at which the business becomes profitable.
- Cost of Acquisition – to be able to assess what they can do to attract new business, the business owner needs to know how much it costs them to acquire a new lead and a new customer
- Value of a Customer – the business owner needs to know three things: i) the average initial spend; ii) the lifetime value; and iii) how much profit per customer.
- Marketing return – the business owner needs to know how much money each of their marketing effort brings in.
Armed with this information, the business owner can begin the make informed decisions.
So, do you know your numbers?