Failing to understand your numbers is bad for business. Scott Trevethan CEO & Founder of Financial Fanatics explains the five numbers every business owner needs to understand if they want to keep the wolf from the door.
Most businesses don’t fail in the technical sense that they go into business bankruptcy. Most businesses that we consider failures just close their doors because they don’t have enough return for the owner or a potential purchaser (including family) to justify the risk of staying in or buying the business.
Business owners look at the number of dollars coming into the business daily or weekly.
Here are the five numbers every business owner really needs to know to stay in business.
1. The business owner’s cash needs (Profit and Salary)
Every life decision has some form of risk associated with it. To be in business inherently contains more risk about getting paid than taking a job. Business owners need to know how much they need to live on. Business owners also need to know how much they need to compensate them for the risk of being in business as opposed to being an employee and will also often need to INVEST in their business and an adequate return on that investment needs to be made.
For every dollar of sales that hits the business bank account, a business owner needs to know what percentage needs to be contributed to them to support their living as well as their profit return.
2. The costs to run the business (operations and loan repayments)
Businesses are hungry beasts that must be fed in order to keep producing services or goods for your customers. There are fixed costs, such as rent of an office, telephone costs and administration and labour that must be paid whether you make a $1 of sales or not. There are direct costs, the cost of supplies and subcontracted labour that make up an element of every sale.
Then there are loan repayments (not just the interest but the cash outlays) that need to be paid each and every month no matter how much activity is being generated in the business.
Business owners need to know how much of every dollar that comes into the businesses bank account needs to be allocated to feeding the hungry beast.
3. The tax that has been collected by the business (government money)
The government deputises businesses to collect tax on its behalf (GST). It also taxes success by taking a portion of the profits of the business to help fund the country. A business owner has to remember that the tax amount is NOT their money. Do NOT use it for the business or for yourself. That is how businesses get into DEEP trouble. A business owner has to know how much of every dollar that comes into the business needs to be set aside to pay the government for the net GST collected as well as to pay the government’s share of their business (just like a shareholder)
Hint: The tax office NEVER takes 100% of what you earn. There is NEVER a logical reason to believe that you would be better off not making the next $1 of sales because of tax.
4. Cash at bank
Business owners need to be aware of how much money they need to support their business, for paying suppliers, employees, and themselves, given the ups and downs of the money coming into their bank account.
This is referred to by accountants as “working capital” but really is just the buffer needed to account for that time variation between when the business makes a sale and when it gets paid for that sale. Ideally the benchmark buffer is 3 x the monthly operations costs of the business based on your average monthly sales for the business. Without this cash, a business will struggle more than it needs to.
Hint: You can build up “working capital” over time
5. Time on business
Every business owner has the same amount of time, up to 24 hours per day, (but even the most prolific entrepreneurs need at least 4 hours sleep). A business owner needs to understand the time they are prepared to dedicate to their business – servicing it and building it. Balance in life is about maintaining healthy relationships with significant others, your body and some form of spiritual connection. If it’s 100% about business most people burn out. The time an owner is prepared to spend on their business might be the same as if they took a job (say 38 hours per week), or more hours might be added due to love for their business. Either way, know the number. This will make you leverage yourself to get more done.
Hint: Elon Musk and Gary V are OUTLIERS. They are NOT role models for the average businessperson.
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