Understanding Your Numbers
Getting to grips with basic terminology, understanding reports or simplifying them, can help grow your confidence when dealing with the financial aspect of your business.
For many business owners, whether sole traders or directors of limited companies, if accounting was never your strong suit in school or since then, you may feel daunted by the amount you feel there is to learn in this aspect of your business.
The popular book by Michael Gerber, The EMyth, is an excellent book for anyone starting out. It describes knowing all aspects of your business before delegating a job to a member of staff. Ultimately, we are responsible for all aspects of our business, so even once delegated, if something goes wrong, ultimately it comes back to us.
Knowing the accounts side doesn’t have to be knowing everything your accountant or bookkeeper knows. It involves familiarising yourself with records or reports but then letting someone else get on with the job. The review is most important. To know exactly what stage your business is at financially at any point in time (and knowing in a timely manner).
Financial Reporting :
Reviewing terms and phrases used in accounts and discussing anything you don’t understand with your bookkeeper or accountant is a good way to start to feel your knowledge growing. Make sure you talk to someone who makes this into simple English and never allow them use jargon to confuse you.
Cashflow versus Profit :
At times accountants are queried about profit level when a business doesn’t appear to have good cashflow resources, yet the accounts show the business as profitable. Again, understanding cashflow and the difference between what is shown as profit and what is in your business bank account, can be reviewed with your accountant or bookkeeper.
Spending money on stock, not chasing people who owe you money (your debtors) or paying creditors early, will impact your cashflow (among other things). Ensuring you stay on top of these and other items that may affect your cashflow can be easily managed once you understand exactly what the cause is.
Basic Management Accounts :
You may have heard you should have ‘management accounts’ prepared monthly and wonder what exactly is involved. For some companies, management accountants can be very detailed reports of profit and loss account and balance sheet, with notes, every month. For other companies, people may only wish to see ‘headline numbers’. These might be sales for the month, wages cost and cost of sales for example. The format of these monthly reports should be determined by you. What reports you want to see and in a format you can understand simply.
In my opinion you should review your numbers on a monthly basis and in a timely manner. There’s no point reviewing January figures in March or later, when two further months have passed. The focus of management accounts is to allow management focus their attention. Know (in a timely manner) if something isn’t working to plan or if there is any difficulty. The reverse is also true, knowing when changes are implemented, how they impacted the bottom line in a timely manner again allows management to make decisions on how to move forward.
Reports don’t necessarily need fancy (read ‘expensive’) accounting packages or reports, it could simply be an excel based report.
Reviewing accounts from an ‘income source’ point of view to learn profit level of each sector of your business, is again going to show you what side of your business you want to grow. If you take the time (or your bookkeeper does) to split out the management accounts by income source or type of business and allocate costs very specifically across each source, you will find out the profit level of each type of work you do.
Knowing that is how we get to the next (most exciting) part.
Growth using Numbers :
Knowing the profit level each section of your business allows you to make better decisions. If you have one side or sector of your business achieving 10% profit margin but another up at 30%, which side are you going to focus your attention to grow profits? This makes decision making simple.
It works for all businesses, small or large, even if you think you have one source of income, you will have different types of clients or different sizes of jobs. Again, which ones are the most profitable if you analysed the numbers in that way. You could look at location as another option. If you work locally, how much time is involved in a job versus working country wide? Maybe it works for your type of business but maybe it doesn’t.
Knowing where you want to grow allows you take action in a very focused manner. You don’t waste time or money advertising or trying to impress anyone who isn’t in your target audience (also what I’ve referred to as an ‘ideal client’ in the past). See Do you know what your ideal client looks like when you meet them?
KNOWLEDGE IS POWER.
Having the accounting knowledge and understanding profitability, cashflow and other matters in your business associated with ‘numbers’ may be daunting. In business we make mistakes, change things around, try again, learn something new and then implement that… and so on.
Learning about numbers is like that too. See it as a new skill you can learn that will help you grow your business in a profitable manner. What’s not to love about that?
‘Live every day like it is your last and learn everyday like you will live forever’ – Mahatma Gandhi
I’d encourage anyone frightened of Understanding their Numbers to give it a go. Learn one new small thing every day and don’t try learn everything at once. Allow time each day to spend with someone who will help you gain knowledge in this area of your business.
Understand the terminology, see headline numbers or basic management accounts once a month and choose your growth strategy based on profit level.
As always, any queries about anything above, you can email firstname.lastname@example.org