Small Business Owners – Know Your Numbers in Four Easy Steps

Small Business Finances

Finances are at the top of mind as many small business owners are now at the stage where they can regroup and have the energy to reassess their financial situation after dealing with the aftereffects that COVID-19 has had and continues to have on businesses.  Understanding your numbers is not exactly an exciting task to add to your ‘to do’ list, however, keeping an eye on these figures will help attain a realistic view of your business and determine what the future may hold.

The numbers are one area that tend to receive the least attention in small businesses. Having an understanding, learning more, and setting up simple processes to give you an overview of the numbers quickly will help you keep an eye on what is driving your business.  It will help you tweak activities, pivot where necessary and focus on that aspect of your business that needs the most of your attention.

Getting your small business financial house in order this upcoming quarter is an excellent objective. Being informed will help you feel more confident about your financials, promptly pay vendors and suppliers and focus on getting your working capital back to targeted levels.

Understanding the Basics

As we enter our third quarter this week on July 1st, it is time to get back to the basics and carefully examine numbers. As a small business owner, I appreciate that your days are full of endless activities required to keep your business running. At the end of the day, the last thing you feel like doing is looking at your financials; however, I cannot stress enough how important this activity is to your business’s success. Even though you probably have an accountant and bookkeeper to assist with your taxes and payroll, it is your responsibility to understand the basics to help you keep your business in the black. Blocking off a couple of hours per week, preferably at a time when you are at your best will help you keep track of the critical financial figures you need to know, what is being spent and what potentially can be trimmed or cut. Before looking at the recommended tasks at hand, an overview of simple terms may be of assistance.

Cash Flow: Your operating cash flow provides an overview of your business. Subtract your operating expenses from the money your small business generates. Your accountant can help you work out the depreciation of your net income for working capital, receivables and inventory. If your operating cash flow is more than your cash outflow, you are operating in the black. If this is not the case, it is time to take a deep dive into reviewing your income and expenses. Every month, you need to have the cash flow to meet your monthly payments.

Net Income: This is your net earnings and profit. From your income, subtract your expenses and taxes (do not include depreciation); this will provide you with a quick indicator if you are earning or losing money.

Profit and Loss: Your P&L statement provides a snapshot of your sales and revenue minus expenses. I would suggest you look at your P&L weekly, monthly, quarterly and annually. Keeping on top of this can be a great motivator in setting focused direction, making plans for the future and setting short- and long-term goals.

Sales: The most critical activity in a small business is sales. Through COVID, companies tend to have fallen into two categories being thriving or surviving. Ensuring you keep a close focus on numbers can help you work out where you have to pivot in the company to increase your sales numbers. Your sales numbers help you determine if you are on an upward or downward trajectory. Your reaction time on the trajectory is essential in keeping the business running.

Price Point: Knowing your price point is critical in small businesses. This is where you know how much it will cost to purchase a good, and then at what point to sell it to make a profit. What is often neglected when working out a price point is the cost of overhead expenses (e.g. utilities payroll and tax).

Gross Margin: This is also referred to as gross profit; it reflects how much money remains after the actual cost of merchandise is deducted from the selling price. If this figure is too low, it will not be sufficient to cover your operating expenses (e.g. salaries, rent, utilities, marketing…). It may also indicate that you are not charging enough for your services or products.

Total Inventory: Inventory is something that has to be looked at a minimum every week. This will help you determine your sales process problems and fix them before you encounter adverse effects such as excess inventory, storage costs, potential waste, and reduced profits.

Your Recommended Tasks:

Knowing your numbers will give you an advantage, you will have a better understanding of your story behind the numbers, and it can lead to being one of the most crucial components of your planning for long term success:

Step 1: Start by assessing how much money you have in your business account, and then list the amounts of your business credit card, line of credit, loans, and outstanding bills. The objective is to know how much money you have at the commencement of the third quarter and your debt load.

Step 2: List all of your monthly expenses in two columns. One for reoccurring monthly expenditures and the other for one-off costs. This will also allow you to review reoccurring monthly costs and see if there is anything that can be cut or reduced. For every line item, ask yourself if the spend at this time is necessary. Notate the withdrawal date of the expense and from what account monthly. For your monthly reoccurring expenditures, if any are related to subscriptions or memberships, ensure you document cancellation or renewal dates to keep on top of the decision to make if continuation is required.

Step 3: Highlight staff member related expenses. Again, assess if each of the costs is necessary.

Step 4: Project revenue over the next six months, subtract the money you have right now and divide your revised monthly expenses for six months. The amount will be your runway, and it is essential to know what you have if you need it. This will also motivate you over the next six months to adjust your expenses even more and help you focus on what you need coming in.

What do your numbers tell you about your business?

Measure everything in your business to monitor progress including revenue, expenses, and customer acquisition costs.

Need Help?

All small businesses should have advisors to help them develop, plan and execute their business strategies. If you need coaching assistance or support during this process, please reach out to me. Book a free 15-minute strategy session here.

I am also happy to pass on an excellent recommendation for accounting and bookkeeping services in Vancouver, my go-to for small businesses is JWL Accounting.

Enjoy getting to know your numbers.

Make it a great week,

Jenny