April 24th, 2013
Business Coach Nick Hughes shares his insights on knowing your numbers in this guest blog post.
83% of Canadian small business owners “face a serious financial literacy gap”, Angus Reid found in a recent survey. That means 8 out of 10 small business owners don’t know how to adequately manage the money!
So if you are like so many small business owners and ignore your financials here is a way to get your feet wet and start to learn your numbers. Track three important numbers; no more, no less. They are Total Revenue, Total Expenses and Profit.
Tracking them doesn’t mean merely looking at them every month; it means much more.
- Set up a spread sheet with 12 months across the top so you can visually see changes in the numbers from month to month.
- Find out the story behind the numbers; dig down. If you have a bookkeeper then you will have all the information on a system like QuickBooks or Freshbooks. If you don’t then use your bank account.
- Compare to last month; to last year. What do the changes mean? If revenue is down are you forgetting to invoice someone? If expenses are up was there an unusual one time expense or do you have to consider trimming costs?
- Get help from your bookkeeper. She/he knows your numbers better than anyone.
Total Revenue - this is the simple one. Everyone understands revenue right? Wrong! Is the revenue profitable? For example, are there some services you are offering that you know to be unprofitable; what percentage of the revenue is that? Should you stop offering the service? Do you have any clients that are unprofitable? Check out the 80/20 Rule. 80% of your revenue comes from 20% of your clients. Are they the 20% of clients you want? Dig deep. Really get to know your revenue; this is after all your best friend!
Total Expenses - this is the cost to run the business. Where are you spending the company’s money? Are you spending it wisely? Do you need to cut expenses, but be very careful. For example, cutting back on marketing costs may save a few dollars but it might also slow revenue growth. Look for expenses that have no direct bearing on building your business and consider reducing them. Dig deep and dig wide. Find out where the waste is and deal with it.
Profit - this is where it all ends! This is the money left over when all expenses are deducted from revenue. Profit must be reviewed regularly each month. Don’t wait until the end of the financial year to find out the profit. Really learn to understand your profit. Why is it not more? Why are you showing a profit and yet there is no money in the bank? Are there legitimate strategies to reduce the taxers on the profit? Love your profit; it is from the profit you get paid and the company’s growth gets funded.
Take time to get to know your numbers. The numbers don’t lie and you will get to love them!
Nick Hughes is President of Your Planning Partners Ltd., a Toronto based consulting firm that helps small business owners build strong sustainable businesses. Your Planning Partners has helped hundreds of clients achieve the success they want for their business. Nick is a keynote speaker and a published author on a broad range of small business topics. You can contact him at firstname.lastname@example.org.