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Each day you wake up and meticulously devote yourself to building your business. You invest the majority of your energy, time, and money into it. Maybe you invest in courses, networking events, and a business coach too. And although it feels like you’re ticking all the boxes and doing everything you should be doing, if I asked you to tell me how your business is doing, would you be able to?
Is your business thriving and exceeding your targets each day? Is it coasting along smoothly? Or is it struggling to keep its head above water?
How would you give me an accurate, detailed answer on the health of your business?
Here’s my point: business is all about numbers. You must know your numbers in business if you want to understand the intricacies of how well your business is performing. And if you want to know your numbers, that means you have to start tracking numbers in your business today.
You likely started your own business because you desired more freedom, more autonomy, more money, and more success. But the only way to truly achieve this is to become an expert in your numbers. This can mean the difference between you going out of business and excelling in your industry.
So, let’s explore the ins and outs of why you must know your numbers in business if you want to succeed.
Why is it important to know your numbers in business?
“Why are numbers so important, Tyler?!”
Good question.
As a business coach, I often begin working with business owners by asking them some very basic questions about their business. Questions like:
What’s your current turnover?
What’s your current cash flow like?
How much profit are you on track to make this year?
Unfortunately, I’m often met by blank stares. These business owners are thinking about the questions I’ve asked, but they have no hope of answering them accurately because they are not tracking their numbers!
My job as a business coach is to help business owners scale their businesses and achieve the success they desire. One of the essential areas that we need to dig into is your numbers. Because these offer an accurate measure of your current performance. The numbers never lie.
When you put measures in place to monitor your numbers each day, week, or month, you get a much clearer picture of where you currently stand and the steps you need to take to move forward and grow your business.
What gets measured gets managed.
What is the most important number in business?
The key numbers you should measure in your business depend slightly on how long you’ve been in business, the industry you’re in, and where you hope to grow in the future. Your business coach, if you have may recommend a set of numbers to measure. But if you’re unsure where to start, there are three key financial reports I’d recommend that every business owner regularly monitors and reviews.
If you don’t have a business coach – check out my article: How to Choose a Business Coach.
These are:
Profit & loss
On your P&L report, you’ll see sales revenue, expenses, and whether your business is turning a profit or making a loss. This report shows all revenue that has been invoiced for, even if it may not have been received yet.
Cash flow
Your cash flow report shows you cash coming into your business (income) alongside the cash leaving your business (expenses). This report is a valuable tool for any business owner. It helps you stay cash flow positive at all times. Monitoring cash flow is vital to ensure you pay employees and suppliers on time, invest in scaling strategies, and continue operating effectively.
Balance sheet
The final key financial report that I recommend you track is the balance sheet. This is a summary of all your assets and liabilities, split into current and non-current. Your current assets and liabilities can easily be converted into cash (i.e., the cash you have in the bank, any stock you have). Your non-current assets and liabilities need time to be converted to cash (i.e., shares or property).
These are the three financial statements and critical numbers that every business owner needs to know and understand to effectively lead and grow the business.
If you want to know more about creating a break-even plan, developing a revenue and profit budget, and a cash gap plan, click here to get a free copy of my Strategy Scorecard.
Other numbers you need to know in your business
Now that you’ve got three key numbers you know you must focus on, let’s explore some other critical numbers that you should also be monitoring.
Revenue (or sales)
Revenue (often known as sales) is defined as the amount of money your business brings in across all business activities over a set period. Although most business owners have a solid idea of how much revenue they’re bringing in monthly, quarterly, and annually, this number on its own will not give you a full picture of how your business is performing. For example, your revenue could be continuing to increase each quarter while your profits are decreasing. This is why it’s equally important to monitor your outgoing expenses.
Equally, revenue does not equal cash in the bank. You might have revenue that takes months before it translates into cash, so monitoring your cash flow is just as important.
Expenses (or costs)
Your expenses include the direct costs of producing the goods or services you sell (e.g., raw materials, manufacturing labor, etc.), as well as any other direct and indirect costs you incur from selling that product or service (e.g., website hosting costs, rent for your warehouse or shop-front, etc.).
Monitoring your costs is imperative when you first launch your business and every day after until you finally exit it. Be savvy about where you’re spending your money and consider whether each purchase is necessary and directly contributing to the success of your business or not.
Profit
Your profit is everything leftover from your revenue after taking off all your business costs, along with interest and taxes and any other expenses.
Similarly to revenue, as a business owner, you should be tracking your profit monthly, quarterly, and annually. You could be making millions in revenue, but this means nothing if it doesn’t translate into healthy, growing profits.
For new businesses, turning a profit may be put on the back burner, either because it’s impossible or because quickly driving revenue is initially deemed more important to help the business gain traction. But for established businesses, profit is a highly significant number and gives you a solid picture of your financial performance.
Profit margin
Your profit margin is your profit to revenue ratio, and this number is always presented as a percentage. This gives you an indication of the percentage of revenue that will eventually convert into profits. The higher this number is, the more likely your business is going to be thriving.
Like profits, your profit margin may be low if your business is in its infancy years because your revenue is likely to be low, while your costs could eat into a large chunk of this.
Cash
Knowing your numbers in business includes knowing how much cash you have at any given moment in your checking or savings account. The more cash you have in the bank, the more peace of mind and freedom you have as a business owner. Particularly as you can never predict future events (lawsuits, recessions, etc.)
Monitoring your cash levels is essential so that you know where you stand and can operate from a place of strength.
Equity
Equity refers to the amount of money invested and retained in your business, either by you, your business partners, or shareholders.
As a business owner, you must always know who owns what percentage of your business. It’s also important to be mindful that when you give away equity in your business, you are giving away a literal piece of it, and you should assume that you will never be able to get this back. It’s not uncommon to hear of founders being pushed out of their business by their investors, so don’t walk into this lightly.
Debt
Equity and debt are both ways of raising capital for your business. Debt refers to any loans your business has taken on that still need to be repaid (usually with interest).
Extra funding is often needed for a business to expand its operations and scale rapidly, so taking on debt isn’t automatically a negative thing. However, you need to keep a close eye on any outstanding debts your business has and ensure they’re being repaid following the terms agreed.
Tax rate
Every business must pay various taxes on their profits, depending on their industry, size, and location. This includes sales tax, income tax, and corporation tax.
Knowing how much tax your business needs to pay in total each year is important. Why? Because it gives you a clearer idea of the profits that will be leftover after tax. If you’re not already working with an accountant and tax advisor, I highly recommend you invest in one. This will enable you to minimize the amount of tax your business pays and gain a stronger understanding of your tax situation.
Accounts receivable
Your accounts receivable number comprises any outstanding money your business is owed (from product or service sales) but has not yet received. These count as your assets.
It’s common for many businesses to have 30, 60, or even 90-day payment terms with clients. This means that your client can pay the money due to you at any point during this time frame, and although it’s still owed to you, it cannot be included as money received.
It’s vital that you create payment terms that work for you and your
business, and also keep track of any outstanding payments and ensure these are
made on time. If you consistently receive late payments from a particular
client or work with people who end up not paying you, it’s time to reassess
your business strategy.
Accounts payable
Your accounts payable figure refers to any money your business owes to creditors or suppliers—other companies from which you have purchased products or services. These count as part of your liabilities.
Many businesses delay paying accounts as much as they can as a way to boost cash flow. If possible, negotiating a comfortable payment term is generally preferable. However, if you want to build a trustworthy reputation around your business, it’s important that you ensure you always pay on time. Treat other businesses the way you want yours to be treated.
Quick ratio
Here’s how to calculate your quick ratio. Add up the sum of your cash, accounts receivable, and any short-term investments, and divide this figure by your accounts payable figure.
This number will give you a solid idea of whether your business has enough short-term assets to cover its immediate liabilities. If so, your business is in a strong position to continue operating as normal. Although it varies between industries, your quick ratio should generally exceed 1. Otherwise, there’s an increased risk that you may not be able to pay your liabilities.
Leads
Knowing your direct financial numbers in business is equally important as knowing your marketing and sales numbers because these feed into those financials.
Are you keeping track of how many new prospects you’re adding to your sales funnel each day, week, or month? Tracking this number will give you a better idea of what activities are working (and what’s not) so that you can concentrate your efforts where it matters most and add more leads to your funnel.
If you want your business to grow, your list should always grow alongside it. Regardless of how big it currently is, any list will eventually become exhausted. Take preventative action now and start acquiring more leads.
Customer acquisition cost (CAC)
Your CAC refers to the total amount it costs your business to acquire one paying customer. That means to work this out, you add up all your sales and marketing expenses and divide this figure by the number of new customers you’ve acquired over a set period.
The CAC is a crucial number. It tells you how effective your current sales and marketing strategies are and whether you need to make any adjustments. This number can also be viewed alongside the average sale value (see more on this below). Ideally, your CAC should be lower than your average sale value to be profitable in the long run.
Conversions
As a business owner, you also need to be monitoring your conversion rates. This refers to how many of your leads turn into actual sales, or new clients won for your business.
This rate can vary due to several factors, including how competent your sales team is, whether you have a strong follow-up process and whether the leads you’re acquiring are your target customer.
Average sale value
As I briefly mentioned above, tracking your average sale value can be helpful. This is because you can compare this to your expectations and predictions and see how close (or far away) you are.
If this figure is lower than you’d like it to be, consider making small increases to the price of your products or services or adding in up-sells or cross-sells at the checkout.
If you take a look at my Profit Equation below, you’ll see how tiny incremental improvements in a few key areas can lead to dramatic growth in your business over time.
By achieving a mere 10% improvement in each area above, you will generate 947% more profit!
Revenue per employee
Finally, your revenue per employee number is beneficial to track because it captures various moving parts within your business. You’re assessing your employee capacity and productivity rates. Plus, you’re considering whether your team has adequate training and the best tools to perform in their role. This number forces you to assess your company culture, which could unknowingly be having a significant impact on your financials.
What is a scorecard and how can it help you know your numbers in business?
In his book Traction (I highly recommend every business owner purchases a copy of it), Gino Wickman discusses the idea of measuring your numbers in business with a Scorecard.
Gino points out the difference between leading indicators and lag indicators. A P&L (profit and loss) is lagging as you get the data way after the fact. Leading indicators is where the gold is at because it allows you to see what is happening in real time.
Essentially, you make a list of all the key numbers you need to track daily or weekly. You assign one person to be responsible for each number and set them a new goal each week. Everyone in the business should know who is accountable for which number. And the Scorecard should be easily accessible across the company.
This is a brilliant way to make sure you know your numbers. The common saying is: “what gets measured gets managed!”.
How to make your numbers more relevant to your business and long term goals
- Make sure you have a basic understanding of ALL of them (no exceptions)!
- Determine what numbers are worth measuring (including non-financial ones).
- Know what you want them to be (set goals).
- Start planning for how you'll achieve your goals.
- Regularly monitor your numbers (daily if possible).
- Be ready to adapt and adjust your plans when necessary.
- Make your numbers visible to everyone in the organization.
Do you know your numbers in your business?
I hope you now understand the sheer power of regularly monitoring and knowing your numbers. This can have a significant impact on the financial health and growth of your business, and ultimately, your profits. I understand this may feel like yet another thing to add to your to-do list. But making time to know and understand your key numbers will help you make better decisions in your business and take the right action.
If this feels overwhelming, don’t panic. Numbers may not be your strong suit, and that’s okay. We all have our strengths and weaknesses. If you need support to get to grips with your numbers, consider working with a certified business coach. This will give you a fresh perspective, help you stay accountable, and give you effective strategies and tools to help you grow yourself and your business too. If you’re ready to take the leap, click here to book a free discovery call with me today.
