There are thousands of metrics you could track when growing your business but let’s be honest: you’re a busy entrepreneur and you just don’t have time for that. However, there is a core set of numbers you need to know how to read and understand so that you can gauge how well your business is faring. Having a clear handle on your finances enables you to make better business decisions, so let’s examine the numbers you really need to focus on.
Profit and Loss
Your profit and loss (P&L) statement tells you whether you’re making or losing money. It almost goes without saying that this is one of the most important numbers to track as a business owner.
You should analyse your P&L at least once a month, or even more often than that. This will enable you to make informed decisions about the direction your business is heading in.
Identifying trends is very helpful. For example, if your profits are slowly decreasing, you should examine why this is. Is it a seasonal trend? Are you spending more or selling less? What can you do to rectify this? This way, you can take action before your business suffers too much.
Accounts Receivable
Accounts receivable refers to money that you are owed by your clients. This is directly linked to your cash flow. If there is a lot of money owed to you, your business’ finances could really suffer. It’s important to stay on top of your invoices and send reminders so that your customers pay you on time.
Accounting software such as Xero can provide invaluable insights into your accounts receivable and send automatic follow ups for you, so it’s a good idea to take advantage of this. If you’re frequently getting paid late, then it may be time to review your payment terms and introduce late fees.
Cash Flow
Your business’ cash flow is affected by many factors and it can feel very complex at first. Rather than looking at it on a monthly basis, try to examine your cash flow on a weekly or even daily basis if possible. That way, you can gain a deeper understanding of the situation and take action before things get out of hand. You should also periodically check that your bank account is being reconciled properly.
It’s important to remember that cash is king – if you don’t have it, then your business cannot function. It’s entirely possible to be consistently making a profit and yet run out of cash if your money is tied up in accounts receivable or illiquid assets.
Profit Per Client
It’s worthwhile to take a look at your profitability per client or customer. This will help you identify which customers are the most profitable for your business. You can then focus more of your efforts on these clients and bring in new ones who fit into this mould as well.
The best way to do this is by creating an average gross margin per client and then examining it over time. You could also group your clients into categories like VIPs, mid-level customers and new prospects to gain a clearer picture of who is most profitable for you.
Item Sales
When you break down your sales by item, this can allow for an even greater level of detail. It will help you figure out which products are the most profitable and what’s driving those profits.
As with many aspects of business, it pays to be proactive when analysing these numbers. Identifying trends early on enables you to maximise your profits by focusing on your most lucrative products or services and eliminating those which are weighing you down.
Summary
Whether you’re a business owner or an employee, it’s important to understand how the numbers in your account book can help you to do better. If you take time each week or month to analyze profit and loss statements, accounts receivable balances and cash flow reports, then it will be easier for you to make informed decisions about what is working best for your company and identify trends that need attention before they become too large of a problem. It always pays to be prepared.
