Let’s be honest - a crystal ball would be so much better than a business coaching expert when starting a new business venture. The ability to predict the outcome would remove a significant amount of stress that burdens small business owners. But, even without psychic powers, it can still be possible to get a good look into the future if you simply look at the numbers.
Most coaching experts would argue that there are 7 significant numbers that should be on your radar:
Working Capital/Cash Flow. This is the lifeblood of the business and should never go unnoticed. Want to stay out of the red? Manage your cash flow. Money in – Money out = Cash Flow. When your operating outflow exceeds your inflow for an unexpected or sustained period, you are in trouble and must reassess.
P&L (Profit and Loss). Often viewed as a timely snapshot of your business financials, your P&L is (Sales and Revenue) – (Expenses) during a specific time period. This is the number that allows you to project future incomes, based on collected data.
Sales Revenues. Keeping an eye on the sales trajectory is a great way to watch for red flags. A significant or drastic drop or raise in sales revenues speaks to a change in the demand in the market and can allow you to adjust how much you are spending and when to spend it.
Price Points. These play a double role - allowing for small business owners to negotiate how much they need to sell products for in relation to production costs, in order to make a profit. They also force you to assess details such as overall expenses, operational costs and payroll/employee costs as well as a solid return for you. They represent your value proposition.
Gross Profit. This figure is exactly how much is left once the manufacturing cost or amount paid to suppliers has been subtracted from sales. This figure must be large enough to cover all operational costs as well as your return. If it is not, then you will slip into the red. If you find this to be the case, it is likely you may need to reassess your price points and raise them.
Inventory. Keeping tabs on inventory totals can indicate problems before they become debilitating. Simple – an unexpected raise in inventory either means a decline in sales or an over-purchasing situation- both of which need to be addressed quickly in order to prevent a monetary hemorrhage.
Customer Acquisition Cost. Marketing, advertising, prospecting- these costs add up. Effective and precise budgeting is the best way to manage these numbers. Make sure to assess them often and build the budgets to include flexibility. You can often speed up or slow down sales by tailoring your marketing efforts, and this is a great way to manage revenues.
Assuredly, there are an infinite more numbers to be assessed, and managing your small business will seem endlessly tedious when attempting to turn those balanced books into management information.
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Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.