We’ve all seen it on Dragon’s Den. The sight of budding entrepreneurs squirming in front of the panel as they try to recall the financial information about their fledgling businesses that will go a long way to determining whether they secure investment or not. But it’s not just your prospects for receiving a cash injection that will suffer if you don’t know your numbers. Having a firm grasp of your incomings and your outgoings is essential if you’re going to avert the threat of a cash shortfall, which is a notorious death knell for many small businesses.
The formative and early years of a business is arguably the most important time for you to have an understanding of the bigger picture. For this to be possible you need to be able to look beyond sales and profitability and focus on additional data. Here are 6 key metrics that you should know inside-out:
1. Sales volumes and value
It goes without saying that the money your business earns will be largely driven by what it sells. Sales data can and should be captured in a number of ways.
Your sales volume tells you how many units of a particular product line you are selling and allows you to track performance over time. Sales value is measured by multiplying the volume of sales by the selling price to give an overall figure. Both should be tracked, but be wary of other factors distorting performance such as rising costs pushing up the selling price.
As the saying goes ‘turnover is vanity, profit is sanity’. Your profit margin is one of the most critical metrics to measuring the financial health of your business.
Gross profit i.e. the amount of profit you make before deductions and overheads, is worked out by subtracting what a product costs you to make or prepare from the sale price.
Net profit is more difficult to calculate because you need to take into account all the costs associated with running your business.
The relationship between sales and profit is pivotal and should form the basis of your financial forecast.
Both your fixed and variable running costs need to be tracked. Not only do these affect the profitability of your business, but they also have an impact on cash flow. This is particularly true of variable costs, which might rise due to an increase in stock levels or staff numbers, and typically outpaces the rate at which you sell your products and receive payment.
It is imperative to record your outgoings on a monthly basis. These should include:
- Personnel costs
- Rent, utilities, business rates and other costs related to premises
- Supplier costs
- Marketing spend
- Loan repayments
4. Monthly income
If you aren’t earning enough to cover your monthly outgoings, then it won’t long before your cash reserves start to dry up and you get into difficulty. Keeping track of monthly revenues helps to ensure you have visibility of this by providing data that tells you where you are at the moment and enables you to set reasonable expectations about what you can expect in coming months.
5. Bank balance
Knowing how much money you have in the bank is the cornerstone of all your transactions. To this extent you should have an accounting system in place that gives you a view of your bank balance at all times and the ability to see how the amount you have in reserve varies at different times throughout the year.
6. Stock levels
Perhaps not an essential metric for all startups, but knowing the total value of stock and how it is distributed among your product lines is paramount for those businesses that need to manage their levels so that a balance is found between minimising costs and having what you need to fulfil orders. Stock inventory tracking should keep pace with sales so that you only order when you need to and avoid accumulating an unnecessary stock surplus.
Startup accountancy packages, including Sage bookkeeping software, are just one of a number of services provided by The Company Warehouse. For more information call one of our Consultants on 01245 492777.