Five Numbers Every Business Owner Should Know
Most successful business owners know their financial numbers by heart so they can spot problems early on or know when to scale. But, at the end of a long workday, pouring over spreadsheets probably sounds like the last thing you want to do. Plus, there’s so much data available that it’s hard to know which numbers you really need to pay attention to.
Anchor Bookkeeping has got you covered. Below we break down the five financial numbers every business owner should know.
Often referred to as sales, revenue is the income received from normal business activities like the sale of goods or services provided. This is typically referred to as the “top line” because it is the first line on a business’ income statement.
2. Gross Profit
Also known as gross margin, gross profit is what you make before operating expenses, interest payments, and taxes. It’s your revenue minus cost of goods sold. For example, if you buy a cup wholesale for $1 and sell it for $2, your gross profit is $1. It is important to know your gross profit per item or service that you offer so that you don’t sell a product or offer a service that you’re losing money on.
3. Operating Expenses
Operating expenses are the cost of doing business – or what it costs to operate your business – and include, but aren’t limited to, payroll, rent, utilities, business development, and travel. Knowing what it costs to run your business from month-to-month and year-to-year will help you determine where you can cut expenses.
It’s important to know not only your current expenses, but past and future expenses so that you can compare and adjust accordingly. For example, if you rent your office space, you’ll want to know what you currently pay in rent and whether or not rent increases from year to year to help you determine if you can afford to stay in that space or if you should look for another building.
4. Assets and liabilities
Both assets and liabilities are recorded on your balance sheet, with assets on the left and liabilities on the right.
Assets are resources owned by the company and include your inventory, computer, business car, investments like land, or other operating equipment. For tax purposes, it’s important to keep up-to-date records on each of your assets including when they were purchased, the cost and depreciation.
Liabilities are your financial debts and obligations, including loans, tax liability, and mortgages/rent. Typically, a business liability is the money you owe for the purchase of an asset.
Knowing your assets and liabilities is key to deciphering how healthy your business is. For example, you might have $100,000 in the bank, but have a $200,000 loan – revealing that you might be heading towards a negative cash flow. Comparing these numbers to your income statement will help you forecast for the future.
5. Cash flow
As the name suggests, cash flow is the money flowing in and out of your business every month. Knowing how much cash you have on hand gives you a high-level overview of how well your business is performing.
Cash flow is calculated by the money coming in to your business from customers who are purchasing your products, or from loans or investor funding received, and money going out of your business in the form of freelance support, office rent, loan payments, taxes, etc.
If more money is coming in than going out, then you are operating in the black. But, if more money is going out than coming in, you might be in danger of going into a negative cash flow and you need to take a closer look at your income and expenses to see where you can cut costs.
Taking some time to get to know your financials is the not-so-fun part of owning a business, but doing so gives you a precious snapshot of your business’ health – giving you peace of mind and allowing you to make well-informed decisions.
If you’re having trouble making sense of it all, we’d love to help! Schedule a no-pressure, introductory call with Anchor Bookkeeping here.