Running a business isn’t always what it is cracked up to be, all of the time. There are actual days as the leader, we have to work hard to make sure the business is thriving. For some, this is not a fun task. For others, this is what they live to do – Crunch the number!
Whether you love it or hate it, crunching numbers is a necessity if you want to grow a thriving business. No matter how great our idea or how strong your customer service is, if you are not looking at the critical metrics that tell your business’s financial story, chances are, you will struggle.
Crunching number is a vital part of not only determining the health of your company, but predicting future outcomes. Strong CEOs know these numbers and understand how they are calculated. They may get help from others around them, but they are savvy enough to be able to determine these numbers on their own.
Let’s face it; your livelihood and your employee’s livelihood depend upon it.
Here are three of the most critical numbers you need to know.
One goal of any business is to increase its profit and a strong measurement of a company’s profitability is to measure how much money a company keeps in earnings for every dollar it generates in sales. Without enough profit and a strong profit margin, your business can become a financial drain. What’s the difference between profit and profit margin?
Profit is represented in dollars and profit margin is represented as a %. It is very easy to get enamored by large dollar values but until you look at the cost of that business, i.e. the profit margin, you will not know if it is a good deal or not. For example, let’s say you are a small retail store and you just landed an account that will generate over $ 100,000 in profit dollars. You may get excited until you look at the cost of that business whereas with all the overhead and direct expenses, you are only making 4% on the overall deal. – Maybe not a good deal.
• Cash Flow
You must have heard it a thousand times.. cash is king. (or in my case -queen). All businesses need cash to survive and they need access to cash. To determine this need, you must know how much cash flow in and out of your business to cover your operating expenses plus give you a large enough reserve to carry you forward in difficult times (and yes you will have them – all businesses do). The Cash Flow statement is a CEO’s friend and typically is broken down into the following use of cash:
1)Operating activities – this is where the cost of your normal day to day operations will fall.
2)Investing activities – this is where any changes in investments ie, property, technology etc..
3)Financing activities – this is where you report changes to cash from the purchase of stock and payments of interest and/or dividends
•Key Performance Indicators
Every business has a series of functions and tasks that need to be completed in order to deliver the best product, service or keep your customer happy. These are called your KPIs and these are performance measurement tools that you can create a standard for all to be measured against and in any frequency you would like. For example, you might set a standard that client satisfaction should be at 98% at all times , or that your accounts receivable should be no older than 42 days. Your team responsible for these functions should be in the habit on reporting on their area’s performance on a regular basis.
KPIs are critical when you expect your employees to deliver certain results. As leaders, we must inspect what we expect and drive performance throughout the organization and uncover potential issues on a regular basis. The use of data and KPIs is the most efficient and effective way to keep your eyes on the business.
Love learning about “the numbers”…. check out our Podcast “Building Financial Confidence” and learn how to become more confident when running your numbers!