When I first get on a call with a potential client – I ask about their financial situation. These financial metrics are important to any business. I want to know right away if they know their numbers. Unfortunately, more often than not they don’t, and then the next words I invariably say are:
“If you don’t know your numbers, then you don’t know your business.”
~ Marcus Lemonis
It’s one of my favorite quotes and there is something that I can add to this saying because the next words should be …and before long you’ll be out of business. So many business owners get into serious cash flow crunches, and it seems to come as a surprise to them. Many don’t even realize they are not actually profitable until it’s too late. Many are working themselves to the bone trying to increase their gross revenue when they should be focusing on how to increase their profit margins.
Why? Because they don’t know their numbers! Your business financial metrics tell you whether your sales are on track, whether your costs are under control and how much money is actually left over (Profit) and going into your pocket. In other words – how financially successful you are.
So – what do you need to know in order to actually know your numbers? There are three key numbers that every business owner needs to know in order to continue to grow and thrive.
1. Annual Sales Revenue
Annual revenue is the total amount of money a company makes during a given 12-month period before any costs and expenses are subtracted.
It’s important to know that revenue and profit are not the same thing and many business owners confuse the two – that’s why the term Sales is used to signify revenue on income statements.
Profit is the difference between revenue and costs.
2. Gross Profit Margins
This number is crucial because it represents the money left over from revenue after accounting for your direct cost (costs of goods sold) of your product or service. Examples of direct costs are direct labor – work done just on a particular product or service, or materials – those used to produce the product or service. This number reveals the efficiency of a company’s production process or how good or bad the pricing strategy.
Although this will vary by industry – a good gross profit margin target is 50%. The better the gross profit margin, the less your business will need to rely on high sales volume. You need to know the minimum gross profit margin you need on every single sale/job/service in order to meet your profitability and cash flow goals.
3. Expenses As A Percentage Of Your Gross Profit
It’s crucial for business owners to know where their dollars are being spent. Your business expenses should be determined as a percentage of your gross profit, not as a percentage of your sales. The reason for this is because you pay your bills with gross profit not with revenue. These three numbers provide the foundation on which every business decision should be based. That is why it’s essential not only to understand what each of these key metrics can tell you about the health of your business, but also to monitor how these metrics are performing on a regular basis.
Can you immediately provide an answer for these business financial metrics? If not – and you need help getting your numbers together, or figuring out how to improve them… schedule a free consultation here:
Of course, there are additional numbers that are important to know for your business to grow and be profitable but knowing these is a huge first step. I know that as a small business owner, your days are packed with endless tasks and the last thing you want to do is pour over your financial statements…
But your financial statements are your roadmap to success.
They will give you the ability to work smarter and not harder and stop chasing more gross sales (and working yourself to death) and instead focus on increasing net profit and living the life you want to live.
