Today, John takes us through the five numbers every business owner should know. Numbers that if you don’t know, will lead you to all sorts of strife.

Here are the five numbers:

1. RECONCILED CASH BALANCE

Your reconciled cash balance is the starting point to manage a cash flow. It tells you where you stand and if you’ve got cash on hand to meet your immediate cost. Make sure that you have a look at your reconciled cash balance, not just what you think you’ve got in the bank.

2. DAILY SALES OUTSTANDING

This tells you how long on average it takes you to get paid after issuing an invoice. If you give credit – and I’d always advice you to think seriously about that – it reveals about the efficiency of your collection policies and a DSO or Daily Sales Outstanding can act as a warning if your headed into cash flow difficulties.

3. BREAK EVEN POINT

Your break even point is the point at which all your revenues exactly cover your fixed expenses. Start by calculating two other numbers: your fixed expenses which are the costs you have to meet including rent, wages, leases, admin cost and they don’t include the variable cost of sales; and your gross profit margin – the percentage of each sale left over after all the cost of that sale have been covered.

4. MARGINS

First of all, let’s not confuse margin with mark up. Margin is expressed is a percentage of the selling price. Mark up is expressed as a percentage of the cost price. Knowing which of your products and services got the highest margin and lowest are therefore one of the most profitable and allows you to make the most of them.

5. SPECIAL INDUSTRY NUMBER

Every business has got one and what it is a benchmark or key indicator that you can see how everything works. If you own a restaurant, it’s how many covers or plates were pushed through in the night or the amount of wastage because that’s where a lot of money leaps out of every restaurant.

RESOURCES MENTIONED

CEO on Demand website – www.ceo-ondemand.com.au

More Profit Less Time website – www.moreprofitlesstime.com

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TRANSCRIPT: PODCAST EPISODE 11

Title: Five Numbers Every Business Owner Should Know

Date Published: September 2, 2015

Running Time: 06:11 minutes

 

Hi this is John Millar. I’m the Naked Business Coach, stripping business back to the bare basics. Today I’m going to take you through five numbers every business owner should know, and if you don’t know this, you’re in all sorts of strife.

Here are the five numbers:

Number one. Your reconciled cash balance. Your reconciled cash balance is the starting point to manage a cash flow. It tells you where you stand and if you’ve got cash on hand to meet your immediate cost. It’s easy to calculate with your accounting software. You can also check your bank balance, deduct any checks written if you still do use checks, or payments made that haven’t been cleared like salaries, rent, and regular bills. Make sure that you have a look at your reconciled cash balance, not just what you think you’ve got in the bank.

The second thing you need to do is to have a look at your DSO or Daily Sales Outstanding. This tells you how long on average it takes you to get paid after issuing an invoice. If you give credit – and I’d always advice you to think seriously about that – it reveals about the efficiency of your collection policies and a DSO or Daily Sales Outstanding can act as a warning if your headed into cash flow difficulties. Track your Daily Sales Outstanding and try to drive the number down. Even if sales increase, your Daily Sales Outstanding should actually stay the same. If it increases, find out why and then get it down. Cash flow is king. Try improving your invoicing processes, negotiate better terms with your customers, or invoicing for progress payments synchronized with your client’s payment schedules.

Number three. Your breakeven point. Your breakeven point is the point at which all your revenues exactly cover your fixed expenses. Start by calculating two other numbers: your fixed expenses which are the costs you have to meet including rent, wages, leases, admin cost and they don’t include the variable cost of sales; and your gross profit margin – the percentage of each sale left over after all the cost of that sale have been covered. It equals the total sales minus the variable costs as expressed in a percentage. In other words, if you’re selling toy for a hundred bucks and it costs you sixty, the gross profit is forty dollars. The gross profit margin, because you’ve worked that out, is only forty percent.

Once you know those numbers you can work out how many sales you need to make breakeven. Your breakeven is your fixed cost divided by your gross profit margin. Pretty simple. The breakeven analysis also helps you work out the profitability of your products, half our sales can drop before you could start making a loss, the units you have to sell before you start making a profit, the effects of changing your price or volume of sales or if cost increased, how much you’ll need the current prices to actually cover those costs?

Number four. Work out your margins. First of all, let’s not confuse margin with mark up. Margin is expressed is a percentage of the selling price. Mark up is expressed as a percentage of the cost price. For example, if you’ve got a new product that costs $100 to buy, and you need to make 40% to break even, how much do you need to sell that product for? I’m going to give you the answer. The answer is simple. Its $166.70, since the profit is $66.70 on a $166.70 sale, gives you a margin of 40%. Knowing which of your products and services got the highest margin and lowest are therefore one of the most profitable and allows you to make the most of them.

Last but not least, have a look for your special industry number. Now every business has got one and what it is a benchmark or key indicator that you can see how everything works. So, let me talk about a few areas that I love to work with. One of them if you own a restaurant is how many covers or plates were pushed through in the night. That’s a special industry number or the amount of wastage because that’s where a lot of money leaps out of every restaurant. They’re just two out of about thirty special industry numbers that we look at when we’re looking at coaching a restaurant.

When there’s somebody that’s in the service industry, we look at staff utilization rate. In other words, if their employed for 38 hours a week how any billable hours are you actually getting back in that week. If you’ve got a hotel, you’re going to be looking at occupancy rates, you’re going to be looking at skip rates, and you’re going to be looking at the amount of breakages and wear and tear that occurs.

Builders, you’re looking at working progress, progress when its due, what’s actually happening in regards to how you’re paying your subcontractors and how you’re being paid within your building game. And the building game is great. We do a lot of coaching within the building game.

And of course in retail, we look at both the sales per square meter of floor space and the cubic meter or part thereof in getting a return investment for any product that sits on the shelf. When you know the benchmark indicators are in the industry, it can help you compare yourself with your peers, measure your business successes, and identify any of your problems.

There are the quick five numbers that every business owner should know inside their business. If you’d like to know more, check us out ceo-ondemand.com.au or moreprofitlesstime.com.

Until next time, this is John Millar, the Naked Business Coach, giving you byte-sized information to take away and apply within your business right away.

Take it easy, have fun, be profitable and look for those five numbers you need to know in your business.

John Millar

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