Knowing your business numbers is one of the most important areas if you want a successful business. Why? The numbers are evidence of how your business is performing, and the fluctuations help identify which business decisions work and which ones don’t. What financial numbers should your business monitor, and which reports should you be using?

Profit and Loss report

The Profit and Loss report shows whether your business is making a profit or not over a period of time. This lets you know if your business is financially sustainable or not. The metrics you should monitor from this report are:

  • Gross profit margin – this metric shows the direct profit margin made on products/services sold, only taking into consideration the costs directly attributable to the sale (i.e. staff wages, production costs)
  • Net profit margin – this metric shows the profit margin made by the business after including all the costs of the business
  • Average sales value – tracking this value identifies any changing trends in the products/services sold, or whether discounting is impacting your income levels
  • Break even point –  informs the sales required over a period of time to break even (make £0 profit). This is the minimum level of sales for business survival
  • Cost of acquisition – the average marketing and sales team spend required to generate a sale 

These metrics give you an overview of the performance trends of your overall business. Knowing this enables you to identify options to improve the results of the overall business. 

Advanced profit and loss analysis

Digging a bit further into the detail will enable greater insight into what is having the biggest impact on results. This includes completing the following analysis:

  • Profitability by product/service – you can complete this either on a gross profit or a net profit basis. Business costs are allocated across your products/services based on specified metrics (i.e. marketing spend across enquiries, or production staff costs against the products built). The results help identify specific products to focus on, remove loss making items and adapt pricing to improve financial performance.
  • Profitability by customer – you can be complete on a gross profit or net profit level. Business costs are allocated against your customer base to see their profitability. This lets you prioritise customers generating the most profit, and potentially remove customers you make a loss from.

Balance Sheet

The balance sheet shows your business financial position at a point in time, detailing the assets and liabilities of your business. The metrics to monitor here are:

  • Cash – This shows the cash available in your business right now! This tells you what you can afford to spend, and whether you have cash available to invest in opportunities, or whether it is required for day to day operations. It is always worth retaining a buffer though for any potential emergencies!
  • Net current assets – This figure shows the total of your current assets (cash and items that can be translated into cash quickly, i.e. stock) less your current liabilities (debts due within one year). This figure is important because if it is negative (i.e. current liabilities is higher than current assets) then you need to identify a way to obtain further funds to settle your upcoming liabilities

Cash flow

The cash flow report shows how the funds are flowing through your business from 3 different perspectives. These are “operating” (from normal business performance), “investment” (i.e. fixed asset purchases) and “financing” (i.e. business loans). The main metric to monitor is:

  • Cash flow from operations – this shows if your business is making money or not from your normal operations. For your business to be sustainable and survive, this figure should be positive over a period of time

Debtors/Sales reports

The debtors report shows the balance owed by each customer at a specified point in time. This lets you know if you are having any specific issues with obtaining payments due. The main metric to monitor is:

  • Average debtor days – monitoring by customer and the company overall to ensure you are receiving cash within your set payment terms. This identifies the customers to prioritise for debt collection
  • % of total sales by customer – this informs you of any particular issues with over-reliance on certain customer(s). This allows focus on specific customers to ensure cash is received on time

How often should you monitor your numbers?

The pace of change in business performance is faster than ever.

Anything less than monthly reporting of your results makes it very difficult to understand the trends in your business. This makes it harder to establish the financial impacts of business decisions made.

Running a business effectively is a mixture of being proactive and reactive. However, for reactive decisions you want the information quickly to minimise the risk to your business.

Forecasting the future!

The previous reports mentioned are usually focused on the historical performance of the business. It is useful to understand how your business has performed, but you also want to know how your business should perform in the future.

This allows you to identify if you are going to achieve your financial targets. It also enables you to be proactive in creating ideas to solve any potential shortfalls, or create contingency plans in case of unexpected events. The most important reports to forecast are the profit and loss and cash flow reports, as these have the greatest significance on your business.

 

Financial figures don’t tell you everything about your business. They do however give a fair view on performance, and how things have gone historically. Using this information can help improve decision making and drive your business in the direction you want to head in the future.

If you require any support in creating or improving your financial reporting, contact Paul at Enrich Accounting here, at paul@enrichaccounting.co.uk or on 07403 407455.