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Do You Know the Smart Numbers in Your Business?
Getting the Basics Right
First things first. It is critical that you have monthly financial statements prepared on a timely and accurate basis. Ideally you should have prior month's financial statements prepared by Day 15 of the following month. If you don't have an internal Accountant/Bookkeeper there are many contract bookkeeping services available to do this for you at reasonable rates.
I recommend as a minimum you have the following reports prepared for your review on a monthly basis:
- Profit & Loss Statement
- Balance Sheet
- Aged Debtors Report
- Aged Creditors Report
These should be reviewed in a monthly owners meeting where you analyse these in conjunction with other business issues using a standard meeting agenda.
In addition, I recommend full financial year budgets are prepared to set up the targets you wish to achieve. The actual performance on a periodic basis is then compared to the budget targets you set at the start of the year. This discipline ensures you are regularly monitoring whether you are on track.
Analysis beyond the Basics
The Profit & Loss
Revenue. Ensure that you have different revenue categories for each different income stream. Calculate the percentage of total revenue you earn from each of these streams.
Consider how to increase these and add new revenue streams through other product/service offerings. What marketing activities and customer based activities can you devise and implement to increase these numbers?
Direct Expenses. Direct expenses are expenses such as material purchases and wages for direct labour that vary with your level of turnover. Capture these separately to your general overhead expenses and calculate what percentage of total revenue these represent. How much do these direct expenses vary with turnover and how can you reduce these as a percentage of revenue? Examples include changing material suppliers through importing off-shore, negotiating fixed transport costs or changing your direct labour mix between permanent staff and subcontractors.
Gross Profit. Gross Profit is your profit after deducting direct expenses but before general overhead. What is your Gross Profit Margin expressed as a percentage of total revenue? How can this be maintained or increased?
Overhead Expenses. Overhead Expenses are also referred to as Indirect Expenses and are expenses that don't tend to vary with sales turnover. These include rent, administration staff and professional fees. Look at expenses that you can reduce such as getting a fixed fee from your Accountant, negotiating a rent free period on an extended lease on your premises or changing your telephone provider and plan.
Net Profit. Net Profit is the most important number to look at expressed both in dollars and as a percentage of total revenue. Consider how this compares to other businesses within your industry and whether it is high enough to keep your business sustainable.
Balance Sheet
The Balance Sheet is an often overlooked financial report which I try and get business owners to look at holistically rather than in detail. The Balance Sheet shows a snapshot of your Assets minus your Liabilities which results in your net assets or equity.
Cash Reserves. If your business has cash at bank, consider how many months of wages or overhead you have covered if the business hit a bad patch. Have you got cash in reserve for a Christmas shutdown or other seasonal decline in revenue. Are you earning a decent rate of interest on these cash reserves or can these funds be used for investment purposes? If you are in overdraft, what amount of undrawn funds do you currently have available?
Liquid Assets. Liquid Assets are your Current Assets less Current Liabilities and shows your current liquidity. This should be a positive number. I also look at Current Debtors less Current Creditors to analyse trade liquidity.
Debtors. The Aged Debtors summary shows the breakdown of what your customers owe you into current, 30 days +, 60 days + and 90 days + overdue categories. You can also calculate the average Debtors Days which tells you how long on average your customers are taking to pay you.
Creditors. The Aged Creditors summary shows the same breakdown as debtors in terms of who you owe money to and how long it's been outstanding.
Net Assets. Net Assets is simply total assets minus total liabilities. It tells you what your net position is and how much equity you have in the business. This is often a valuable number to build if you want to borrow against the business as the banks look at this within your business as well as debt serviceability from your Profit & Loss.
Advanced Smart Numbers
Advanced Smart Numbers are numbers and ratios you can calculate when you really know the key drivers within your business. Great business owners generally have 3-5 of these that they monitor and can quickly ascertain how the business is performing by reviewing these.
Service Businesses. Some of the smart numbers to look at for a service business might include:
- Blended Rate per hour (weighted charge out rate for hours charged if business based on hourly fees)
- Direct Labour Rate per hour (Average amount paid out per hour to direct labour employees)
- Overhead Rate per hour (Cost per hour of overhead expenses)
- Gross Profit by Direct Labour Employee (Revenue charged less gross wages)
- Other Direct Expense Ratios ( Materials as % of revenue, Transport as % of revenue etc)
- Key Overhead Expenses (Analyse what % of total revenue key expenses cost you including indirect wages, rent, motor vehicle expenses and telephone)
Product Businesses. Some of the smart numbers to look at for a product business might include:
- Average Dollar Sale
- Number of sales transactions
- Number of unique customer sales transactions
- Average margin per sale
- Average margin per product
- Cost per sale
- Material input cost per product
- Direct Labour cost per product
Combined Service/Product Businesses. These businesses would utilise a combination of both of the above.
Darren Bourke, Business Influence, 2008. You are welcome to "reprint" this article online as long as it remains complete (including the "about the author" information at the end).
About the Author Darren Bourke is a Consultant, Business Coach & Mentor who helps small & medium businesses struggling to maximise profitability, productivity, people and performance. His Free Report titled What Successful Owners of Growth Businesses Do That You Don't, newsletter and updates are full of strategies and tips to make your business boom. Sign up now at http://www.businessinfluence.com.au
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