7 tips on how to better understand your financials

As a business owner you know that financials are not the most attractive part of your business day. Its easy to put off looking at how well you're going. Sometimes its easier to see wads of cash heading to your bank account and thats your peace of mind. Leave it too long and you may be in for a big surprise. Its understandable. Your days are packed with an endless number of tasks in order to keep your business on track. When you do finally take a break, it’s probably not to pour over your financial statements. But that's a big mistake.

Firstly, its important to get all of your transactions entered into your financial tracking system every month. You can review the figures when its quiet. It might not be your most favourite activity but it’s important to keep a close eye on the critical numbers that help you to predict the success of your business.

Without tracking a few key financial figures you have no idea how much you are spending and what you can trim back on. You don't know when to lower your overhead costs or expenses. Your objective should not be to see how far you've come in the past year. It should be to track your progress against where you hope to be in the coming year. So understanding your financials is essential for making smart business decisions going forward. You are the business owner. You have a lot invested so you should know the basics at the very least. Take a moment to familiarise yourself with these magnificent financial indicators.

1. Turnover ( Revenue in the US )

Your turnover is the total money you have taken from you customer, regardless of your costs. Do not include government sales tax. This can also be used to establish the value of your business. Generating sales is the reason most of you run your business. This figure is a must have on your critical numbers list. Keeping a close eye on sales is important as a drop in sales could be a warning sign of trouble. By contrast it’s important to pay attention when sales are up. Determining why sales are good at the time your business is on an up track is easier than trying to understand it later. Reacting quickly to an increase in sales allows you to determine what you need to keep doing to build on that growth.

2. Price Point

You should know exactly how much it will cost you to purchase your inventory and then what you will need to sell those products or services so that you make a profit. This is a critical number for restaurants and other retailers. When you determine price point make sure to take into account all your overhead expenses such as utilities, payroll and sales tax.

3. Total Inventory

Monitor your inventory numbers regularly to ensure that the amount of your inventory is not gradually increasing. This could be a sign of sales trouble. By tracking your inventory on a regular basis you can identify problems early on. You will avoid the negative effects of excess inventory including storage costs, reduced profits and potential waste.

4. Cash Flow

Operating cash flow provides an overview of the economic state of your business. This figure is calculated by subtracting your operating expenses from the money your company generates during normal business activities. It includes depreciation to your net income and adjusts for working capital like receivables and inventory. When your operating cash inflow exceeds your cash outflow, this is a sign that you’re operating in the black. If the reverse is true, it’s time to take a closer look at your income and expenses.

5. Net Income

Closely related to cash flow is your net income. This is also known as your net earnings and net profit. Net income is the result of subtracting all your expenses, including taxes, from your income. It's not adjusted for items like depreciation. Like cash flow, your net profit is a good indicator of whether you're earning or losing money.

6. Profit and Loss

This figure is found on your Profit and Loss statement. This is a snapshot of your business income (sales and revenue) minus your expenses. Your statement will be for quarterly, every six months or yearly. Knowing your business profit and loss allows you to project your earnings and make realistic plans for the future. The profit and loss statement typically follows this format:

Sales (or turnover)

Less: cost of sales (your ‘direct’ costs, such as raw materials)

Equals gross profit

Less: fixed/business overheads such as rent, rates and salaries

Equals operating profit or profit before tax

Less: tax payable

Equals net profit.

7. Gross Margin

Also known as your gross profit (and related to price point) this figure reflects how much money remains after the actual cost of your merchandise is subtracted from the selling price. If this figure is low and not enough to cover your operating costs, such as salaries, rent, marketing and utilities, then you're likely not charging enough for your products and services.

It may not be as exciting as marketing or making a big sale but understanding your critical financial numbers will give you precious peace of mind, reduce stress and provide a vision for what the future holds for your business. It will help you make better decisions and improve your ability to communicate productively with your accountant. By doing so you will ensure that your business stays in the black!

The Business Minder will help make your business magnificent.