The key numbers you need to make good decisions for your business
You’ve got big plans for your business. There are courses you want to offer, new products you want to sell, premises you want to rent. Yet, there is a lingering nervousness as to whether you’re making the right decisions for the future of your business.
I’ve outlined below nine key pieces of information that you’ll need to have to help make well-informed decisions for your business. Take the time to work your way through the list to see what you already have, and what you need to compile.
The key numbers
1. Cash in the bank
How much money is currently in your business bank account? How much of that sum can be used as a cashflow buffer i.e., it’s not allocated to paying your current liabilities (short term debt)?
2. Current assets
Current assets are those assets of the business that are able to be quickly turned into cash e.g., inventory.
Your accounts receivable (also referred to as debtors) are also considered to be current assets. Debtors are businesses or individuals who the business has invoiced, but who have not yet paid you.
3. Current liabilities
Current liabilities are those liabilities of the business that need to be paid within the next 12 months e.g., tax or super.
The business will have received an invoice for the amount due or have an obligation to pay a certain amount on a certain date e.g., PAYE, for the liability to be considered a current liability.
Your accounts payable (also referred to as creditors) usually make up the bulk of your current liabilities. Creditors are businesses or individuals who have invoiced the business, but are yet to be paid by you.
4. Average monthly expenses
Do you know what your average monthly expenses are? Not only the expenses you pay each month but the expenses you might pay annually, bi-annually etc averaged out over the year.
5. Guaranteed monthly income
Do you have any income that is guaranteed each month? Perhaps you have clients who are on monthly payment plans or regular retainers.
6. Expected monthly income
What is your expected monthly income? An essential number for any business!
The nature of running a business means that our income can be variable. Do you have any leading indicators in your business that give you an idea of what your income will be for the month?
For example, do you know that if you spend $1000 on ads then you’ll sell between $4000 and $5000 of your products? Perhaps you know that the conversion rate of your sales calls is 50%, so the number of sales calls you have booked in for the month gives you an estimate of your income for that month.
7. Total profit and loss
A profit and loss statement is a financial statement that summaries the income and expenses incurred during a specified period e.g., a financial year.
You can print P&L statements from your bookkeeping software or have your accountant do this for you. You’ll want one of these statements at the end of the financial year and you may also want to run these statements during the year to see how your income and expenses are tracking against your budget.
Within your P&L statements you’re looking for your bottom-line profits and whether there are any trends from month to month.
The numbers you look at will depend on the decision you're wanting to make e.g., if you’re deciding whether to buy more insurance, you’ll need to look at whether you have available funds for that extra expense over the next few months.
If you want to upgrade your website, you’ll need to ask if that amount of marketing spend is going to be reflected in the sales you’ll make as a result of the upgrade, based on what you know about your buyers and your products or services. Also, you’ll need to consider if you have the cash buffer to pay that amount up front as that can be usual when paying for a new website.
8. Balance Sheet
A balance sheet is a financial statement that summaries the assets and liabilities of the business at a particular point in time e.g., at the end of a financial year.
9. Your budget
When making decisions within your business you’ll need to refer to your budget to consider the impact of your decision on the numbers within your budget.
If you don’t yet have a business budget then read “6 steps to easily create your business budget”. That blog post will step you through how to create the budget you need.
Your bookkeeping software will allow you to run a report that compares your budget to your actual year-to-date figures. That report is a useful one to have for your monthly review.
To make good financial decisions for your business, you need to know your numbers. While you may have a bookkeeper to keep your numbers up to date or an accountant to prepare your end of year accounts, it's still important as the CEO of your business to understand where your numbers come from, and what they mean for the future of your business.
If you’re wanting to make good decisions for your business, but you’re not yet comfortable looking at your numbers, then book in a 20-minute call with me to discuss how I can provide you with support to achieve your business goals.