Gross profit and gross margin are two key numbers in every business. They are also…
Too Many Numbers and No Idea Where to Start?
Do you feel overwhelmed by all the different numbers in your business?
Are you getting the information you need from your accounting system to make decisions? Never fear, you’re not alone, and there’s a quick and easy solution. Whether you’re starting out in business or well established, it’s important to find a few numbers to focus on. “But how do you choose?”, I hear you ask, “There is just so many.”
Remember the start-up phase of your business when you worked hard to get some sales, to deliver your product or service and get some runs on the board, some money in the bank and your actions were focused solely on creating income? At that point, you were focusing on one number whether you realised it or not. You were focused on income or revenue.
As time goes by and the income increases, so do your expenses and potentially at some point you’ll find that you’ve run out of money in the bank even though you’ve had good sales and the income is increasing. During this period, you’re still focussing on the income, when you also needed to be focusing on a couple of other key numbers.
Sales are great, but they’re not money in the bank until the client or customer has paid you. Sales for the year of $500K when the accounts receivable or outstanding invoices is $200K is not good for your cash flow. At this stage, the second number to focus on is the accounts receivable and particularly chasing up any invoices that are overdue and beyond your payment terms.
The other side of this is the accounts payable. What bills do you have to pay and when are they due or are they overdue? The key here is to make sure that all bills are entered into your accounting system so that you have accurate information and can identify quickly and easily what you owe.
Income, accounts receivable and accounts payable will help identify your cash flow and what actions you may need to make to improve it, however, what these don’t show is whether you are making a profit or not.
When you’ve got your cash flow under control and often whilst you are working on improving those three numbers, it’s important to make sure that you are making a profit and that your gross margin is appropriate for your business.
When looking at profit, you may want to be focusing on gross profit or gross margin, or overhead costs. Or even to delve into the detail of specific cost of sales line items, or specific overhead costs.
For more on profit, head over and read my previous article, Why gross profit is not bottom line profit and does that matter. This article explains the difference between gross profit and profit and why it matters.
What you’ll find is that over time the key numbers to focus on will change as your business develops and your understanding of the numbers improves. There will be times when one number is the key to the ongoing success of the business or the attainment of your goals, and then that number isn’t so important for a while, but later it does become key again.
I recommend identifying three to five numbers to focus on and do so for at least three months before changing any of them.
Numbers are overwhelming when you’re looking at all of them, and it creates pressures in the business. Measure the pressure the numbers are creating in your business by taking The Business Barometer quiz.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE