The building blocks of entrepreneurship: Know your numbers
4 Jul 2018
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Whether you are an inventor, a marketer or an entrepreneur, it is of paramount importance to “know your numbers”. But the question arises: Which ones? There are a lot of numbers in business, from metrics to finances, and a company will typically use a range of these to determine their Key Performance Indicators. Yet, the fundamentals of business remain the same. Put simply, a business has to bring in more money than it spends to make a profit and how it does that dictates the success or otherwise of the business.
Depending on the business model, a company’s highest outgoings will generally relate to wages, premises overheads and stock purchases. That’s why my first question to any business owner is: How much do you spend on salaries, occupancy costs, and goods to sell? These are simple, high-value figures and each and every business owner needs to know them. Once they do, there is an array of other numbers they should also know well, including margins, discounts and more.
All these numbers not only inform management KPIs but staff KPIs, too. If you are an entrepreneur, it’s all too easy to assume that owners of other businesses know these things too, but very often either they don’t know, or don’t prioritise them. This means it is harder to make precise predictions about the company in terms of what is achievable. Without a deep understanding of the numbers, predictions become wild guesses.
So how do you peel back the layers and get to grips with the drivers of your business? It’s relatively easy to pull together your fixed costs, such as rent, leases and so on. But it’s a little harder to manage the variable costs and unpredictable sales, and my recommendation is to assume the worst-case scenario. This will guarantee you have a margin of safety.
Breaking down your costs to a daily level gives you meaningful information. If your costs are $3,000 a day, then it’s a no-brainer that your sales must exceed that number ever single day. A business owner should share the basics of that information with their staff, and make it part of their daily targets. Many businesses set monthly targets, but this is the least effective mechanism I know for driving profit. Why? Because staff need to relate to their daily productivity to have a daily sense of achievement.
As for the bigger issue of getting to grips with your balance sheet and profit and loss, invest in good training. It doesn’t take long to do, and the investment is well worth it. Once you’ve practiced and developed a habit of eyeballing the numbers, you will quickly spot areas of concern. What’s more, you’ll find opportunities to improve your business and achieve greater success.
To many business owners, finances, spreadsheets, margins and mark-ups are boring, stressful or even frightening. But even with the luxury of a good accountant, I am resolute in my conviction that a business owner has have a good understanding of the key metrics that make the difference between profit and loss. Failing to do this can spell disaster for your business. But know your numbers, and your business can thrive.