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The importance of knowing your numbers
28 March 2024

The reason that many business owners start their own business is for more flexibility and ultimately, to make a profit. But how do you get there if you don’t really know what the numbers in your business mean?

In the world of business, understanding your numbers is like having a secret weapon for success. Your financial numbers will allow you to make informed decisions about the business and allow you to track its progress.

 

The key financial numbers you need to know:

 

Cash flow

 

It’s important to remember that cash is king!

Your cash flow is a fundamental part of your business finances, which is why it is vital to have accurate cash flow statements so that you know the exact amount of funds at any given moment. You can’t make plans and decisions about your business without accurate information, so we would suggest you review this regularly and track how your situation is changing. It’s important to stay on top of your cash flow so that you can maintain relationships with suppliers, pay your staff and invest in growth opportunities. If you don’t manage this, you could be making bad decisions and putting your business at risk.

 

Profit and loss

 

The profit and loss statement is crucial, as it gives you a snapshot of the financial status of your business and whether your business is making or losing money. This report shows all revenue that has been invoiced for, even if it may not have been received yet. Reviewing this often will give you a good idea on how the business is doing, allowing you to make realistic plans for the future like expansion or increasing staff or identifying areas where you can possibly cut costs.

 

Net income

 

Closely related to the cash flow of the business, the net income is a good indicator of whether your business is making or losing money. This financial number is worked out by subtracting all the expenses, including taxes, from the income that your business makes. Knowing this number will help you determine the financial position of your business.

 

Sales

 

One of the most important aspects of a business is sales, so it’s important to keep a close eye on whether your sales are going up or down. Without generating sales your business can’t make any improvements on your financial situation! Identifying trends and monitoring your sales closely will indicate which products or services you should be focusing on and which to discontinue.

 

Accounts receivable ageing

 

Accounts receivable refers to the money that you are owed by your clients. This is directly linked to your cash flow. If there is a lot of money owed to you, your business’ finances could really suffer. It’s important to stay on top of your invoices and send reminders so that your clients pay you on time. Accounting software, like Xero, can provide invaluable insights into your accounts receivable and send automatic follow ups, so it’s a good idea to take advantage of this.

 

Profit Per Client 

 

The best clients aren’t always the ones who pay the most so it’s worthwhile to take a look at your profitability per client. You can easily find this out by taking the total fees received and subtracting the expenses involved. Then, divide this number by the hours that you spent on the work to calculate the hourly wage per client. You may be surprised at just how much this can vary!

Once you have this information you can use it to attract clients that will earn the most money with the least time spent.

 

Still struggling with understanding your numbers?

 

It is vital that you stay on top of your financial numbers so that you can understand how your business is performing and give your business the best chance of success.

We understand that not only can financial statements be overwhelming, but they are also very time consuming to look through and make important big decisions from! At Your Support Team, this is what we love the most, so if you’re needing any help understanding your numbers, please get in touch.