Money isn’t everything. But how you manage it is. Managing your business by the numbers is an important habit for every business owner to practice, no matter what size or industry. Knowing your numbers gives business owners power and clarity to make informed, confident decisions.
As a professional Accounting and CFO firm, with 50+ years of collected experience, we know first-hand the impact of having a monthly financial summary with KPI’s, or Key Performance Indicators, has on a business. The difference is night and day.
In this post, we will be covering what managing by the numbers means, why it’s important, and how you can start tracking the 3 most important numbers in your business right now.
What is managing your business by the numbers?
It means gathering financial data, performing calculations, and analyzing the information. That information should be in a summary report style and is crucial to knowing truly how well your business is performing.
The key is tracking your numbers on a regular basis. Make it weekly or monthly–depending on the size of your company.
It doesn’t have to be a big process; it should be simple. The most important thing is that you start doing it now.
Why is it important?
How many times have you made business decisions based off of feeling or that have been reactive? This is because you are not harnessing the power in your numbers. National Business Capital & Services found that 60% of business owners aren’t confident in finance and accounting. And that is what separates good business owners from great ones. Get to know your numbers, they won’t bite I promise.
Here are 5 major reasons why managing by the numbers is important:
- Reason #1 Improves your business – Bottom line is you want to make more money as a business. Your numbers are like a roadmap that shows you how to make that happen.
- Reason #2 Gives you confidence – You will feel more empowered to make decisions with the data to back you up.
- Reason #3 Makes you a productive and efficient leader – Numbers tell you where your attention is needed and helps you stay on top of your teams and their processes.
- Reason #4 Saves you money – It allows you to spot the weak points fast and adapt, before it’s too late.
- Reason #5 Brings in more money – Numbers allow you to spot opportunities when needed.
The 3 numbers to know and track in your business
In this section, we will go over the 3 financial numbers you need to track, how to track them, and what they mean for your business.
- Cost of Goods
- Net Profit Margin
Revenue: this is what’s called your “top line”. It’s the gross income your business made in a certain period. Revenue is the base of many major KPI’s.
How to track:
- Find your income statement, your revenue will be the number at the bottom.
What does this number mean?
- Like with anything in business, improvement is important. So here is what you do with your revenue: 1. Compare it to last year’s revenue for the same month. 2. Compare it to your goals for this year.
- Did you hit your goals? Did the numbers improve? Then, ask why. Find out what was happening at the time that caused the improvement or decline.
Cost of Goods Sold: known as COGS, also lives on your income statement. It breaks down how much it costs to manufacture the products you’re selling. For service-based businesses this will mainly consist of the number of hours your employees worked and any other vital costs it takes to provide your services.
How to track:
- Find your income statement, and below your revenue you will find your COGS.
- It’ll show you the amount of money spent on staff, software, and materials.
What does this number mean?
- For product-based businesses: How can you lower that cost? Can you negotiate with manufacturers or wholesalers? How does the cost of goods fluctuate over the course of the year? Do you see any patterns?
- For service-based businesses: Your commodity is your people’s time. Analyze it and make sure your team is efficient. How much of their time is going towards billable hours for your clients? Are your employees in the right position? Would they be better suited for a different role? How can you keep the cost of your goods low without sacrificing quality?
Business Owner Tip:
Ask your accounting team to calculate your “utilization percentage” per employee. This will give you a detailed analysis per employee to help manage their hours to be profitable.
Net Profit Margin: This is your Bottom Line ÷ Revenues = Net Profit Margin. This is the “left over” after taking into account your expenses. It is a major goal to achieve as a small business. According to Small Biz Trends only 40% of small businesses are profitable.
How to track?
- Ask your accountant to find you a Profit and Loss statement, it will show if you were profitable or at a loss for the month. For rule of thumb, you want to aim to be 10% profitable at all times.
What does this number mean?
- This number is a true indicator of how healthy your business is performing.
- Creating a profitable business is a big goal to hit and doesn’t happen without careful planning and strategy.
- Work with your accounting team or seek financial expertise to come up with a plan to get your business profitable.
The 4 steps to manage your business by the numbers
Step 1: Create & Customize the Report.
Choose a style
- Manual: Use excel or Google Sheets.
Make it digital, customized, and consistent.
- Digital – not on a piece of paper, not in your head, on a digital document—you do NOT want to lose this information.
- Customized – Look at tools that you already use whether it be a time tracking application or a marketing software and gather the data points from those tools to calculate KPIs that are important to your business.
- Consistent & Systematic – when analyzing your numbers each month make sure that you are grabbing the same data points each time. That way you can accurately compare your numbers to the past.
Step 2: Understand your report.
- The summary report should be simple and straightforward. If you enjoy visuals ask your accounting team to create graphs for you.
- Your accounting team should be able to tell you what each metric means and why it’s important to your business and industry.
Step 3: House the report.
- Keep it in a shared drive, Box, Dropbox, Google Drive, somewhere your team can also access it easily.
Step 4: Make it a priority.
- Hold yourself accountable to looking at this report at least once a month. That means setting time away in your calendar to look at it with your accounting team, business partner or CFO.
Your accountant should not let your numbers intimidate and confuse you. Instead, your numbers should tell you a story about your business. Your accountants are there to help guide you through it.