Know Your Numbers

Knowing your numbers means knowing your business. Even if accounting and finance aren’t your strongest points, as a business owner, knowing your numbers is critical to the success of your business. So, what does ‘knowing your numbers’ actually mean in real terms for an SME trade or construction company? And how can you get to know yours?

The Important Numbers

As a business owner, you need to know these numbers like the back of your hand. So, get out your notebook or sit down at your computer - you’re going to want to work these out.?

1. PROFIT?

Profit = Revenue - Expenses

This one number can tell you what sort of state your business is in. It takes into account the money coming in, and the money going out. Or more precisely, your company’s sales (revenue) and the costs associated with those sales (expenses). These include things like employee salaries, office rental, travel or phone costs, depreciation of tools or the purchase of goods. And don’t forget to add in taxes here too. Tracking this number over time (monthly, quarterly or annually) can expose trends to help you make future projections and help you evaluate if you need to grow revenue or reduce expenses to increase your company’s profitability.

For a new start up business where profit is reinvested to grow the business, it can be handy to understand what that reinvestment might look like.

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2. CONVERSION RATE (from leads to customers)?

Conversion Rate = Conversions from a Specific Time Frame ÷ Number of Visitors to Site or Landing Page x 100%

The conversation rate number is the percentage of leads which turn into customers. It’s a useful number to see how effective your marketing is at a particular time, or over a particular campaign.

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3. CUSTOMER ACQUISITION COST

Customer Acquisition Cost = (Total Sales + Marketing Expenses) ÷ Number of New Customers

This number tells you how expensive finding new customers is for your business. It is another useful number showing you how effective your marketing is, and how your marketing spend compares with what those new customers bring in. It can show you at a glance if you might need to ramp up, or reduce marketing costs.

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4. CUSTOMER RETENTION RATE

Customer Retention Rate = (Total Customers at End of Period – New Customers During Period) ÷ Customers at Start of Period x 100

This number is a percentage of customers that stay with your business in a given period of time. A higher number tells you that you are keeping your customers happy, which is important as keeping customers is often less expensive than having to find new ones.

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5. WORKING CAPITAL?

Working Capital = Current Assets - Current Liabilities

Working capital tells you the amount of cash your company has, and how ‘liquid’ it is. It’s a snapshot of the financial health of your company at a particular point in time. Too little working capital and your business may struggle to grow. Too much may mean that you need to think about how to better invest your cash. Current assets include things like cash in bank accounts, prepaid expenses and any inventory. Working capital is calculated by taking this figure and subtracting any accounts payable, payroll due, unpaid taxes or loans and debts.

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6. OPERATING CASHFLOW?

Operating Cashflow = Net Income + Non-Cash Expenses – Increase in Working Capital

Operating cashflow measures the amount of cash generated by normal business operations to assess a business’s performance and the financial success or viability of a company’s core business activities. It can indicate whether a business can generate sufficient positive cashflow to maintain or grow its operations and can be one of the more challenging numbers to calculate for SME’s due to the many included variables. Operating cashflow can be calculated by taking the net income of a business (often found on a bank statement) and adding in non-cash elements such as depreciation. Then subtract off changes in working capital (see point 5 in how to calculate).

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7. BREAKEVEN POINT?

Breakeven Point = Fixed Costs?÷ (Sales Price Per Unit – Variable Cost Per Unit)

In order to build a profitable business, you need to know at what point your business’s total revenue equals total costs. Above this point, you’re making a profit, and below, your business is running at a loss. It tells you how much you need to sell, or how many jobs you need to complete, before you start making a profit.?

Let’s say you have a job that will pay you $10,000. It will cost you $1,000 in materials and $2,000 in labour. This is your Gross Margin. You also have fixed costs you need to pay, such as $500 per month lease on your ute, $300 per month to rent a shed, and you pay yourself $1,000 a week ($4,000 per month). At the end of the month, you will end up with $2,200 left over.?

So, if the job was worth $10,000 and your profit was $2,200, then the break-even point is $7,800.?

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8. PROFIT MARGIN RATIO?

Profit Margin Ratio = (Revenue – Expenses) ÷ Revenue x 100

While you don’t need an accounting degree, knowing your numbers can make the difference between a well-run, profitable business and one that can’t weather an economic storm (think GFC, or pandemic). Knowing your numbers well, means knowing if you’re in a good position to weather any of these unpredictable storms and to make informed decisions at the right time to ensure your business thrives.

If you would like to get more advice about how to get to know the numbers of your trade or construction business, contact the team at Consultya on 0428 20 40 50 or [email protected].