The 4 Numbers You Need To Manage Your Business
The numbers you need to run your business are as critical as the dashboard you use when driving your car.
Odometer, speedometer, rear view mirror, warning lights, fuel gauge and estimate of fuel remaining are the measurements in your car equivalent to the numbers you need in your business. Let’s explore these.
1. Cash Forecast
For small businesses, managing cash is crucial. It’s the equivalent of the fuel gauge. It doesn’t seem so important when you’ve got plenty of fuel in the tank. Get down to the yellow warning light and you start having to predict how far you can get before running out.
Run out of cash and that’s the end of your business.
Managing cash by looking at the bank statement when it arrives in the post is asking for trouble. If the bank balance comes as a surprise, then you’re running blind.
with a cash forecast, you can predict cash peaks and troughs
A business should always have a cash forecast for the month ahead. That way with a cash forecast, you can predict cash peaks and troughs. When times are tough i.e. the yellow warning light, with a forecast, you can accurately predict your bank balance ahead to be sure you can pay the wages and bills.
2. Order Pipeline
Most business owners have a good feel of how strong their order pipeline, or forward order book looks.
For many it ebbs and flows dependent on the industry or season. At some point this reactive approach will leave the pipeline short of work. The business then has to resort to some proactive marketing and selling.
The pipeline consists of leads, opportunities, quotes & new customer orders. These can easily be tracked and evaluated in a Contact Management system or Customer Relationship Management (or CRM) system.
The pipeline does need to be tracked to know the conversion of leads into orders and the reasons for rejection. It also needs to be fed with new leads through marketing campaigns to prevent it drying up.
3. Gross Margin %
gross margin % is gross profit £ / sales £
To explain this, let me define gross profit first: sales less variable costs. These are the costs that are directly incurred to fulfill the invoiced sale. The gross margin % is gross profit £ / sales £. It’s a variation on the % markup which is variable costs £ / sales £.
Managing the gross margin % is particularly critical for product based businesses. Too many giveaways, discounts & returns will decimate the gross margin %. Each sale should have the gross margin % analysed to see where the business can improve.
If the business knows its overheads then it can work out the “break-even” i.e. the volume of sales at the expected gross margin % to at least cover the “fixed” overheads.
4. Profit available to owners
When as a business owner you start up, knowing how much profit is available to pay you as the owner is perhaps the most important number. You have the same household bills to pay as anyone else.
As the business grows, it may become a limited company. Instead of taking “drawings” you will take a salary or dividends.
As profits grow further, the amount you need to take out of the business no longer eats up all the profit. At this point, minimising the tax bill becomes more important.