You’ve heard it many times before – business is all about numbers. Knowing your numbers and the story behind them is essential. They help you identify where your business is at, and you can make informed decisions that have the potential to impact your organisation significantly.
Business financials can be intimidating, especially when you’re not an accountant or a finance person. However, a basic understanding of the numbers you need to understand will equip you to run your company better and place it in a position for success. To help, I’ve narrowed the list to the most critical financial numbers you should pay attention to.
Key Numbers to Track In Your Business
Revenue
Also called “sales”, revenue is the total money you earn from selling goods or services. Tracking revenue is vital, especially if your main objective is to grow your business. This metric helps you spot trends, understand your company’s financial performance and set growth targets.
Expenses
Expenses refer to the costs associated with running your business, like salaries, rent, utilities and inventory. Keeping an eye on costs allows you to see where and how much you spend your money. It also helps you identify the areas where you can reduce expenses, improve efficiencies and optimise your bottom line (the money you have left after paying all your costs).
Profit
Naturally, another important financial number that you should monitor is your profit. This is the difference between your revenue and expenses. Tracking this number helps you see how much money your organisation has earned at a certain period after all costs are paid out. Your profit shows you if your company is financially sustainable and allows you to forecast its potential growth.
You can monitor your company’s revenue, expenses and profit by looking at your company’s profit and loss, also referred to as an income statement. If you want to know more about P&L, you can read our previous article here.
Cash Flow
From its name, cash flow refers to the amount of cash that moves in and out of your company at a given time.
No business will survive if it doesn’t monitor and properly manage its cash flow. A company could be profitable, but it may fail if it doesn’t have cash. Tracking your cash flow helps ensure you have enough funds to settle bills, pay off debts and invest in growth.
Gross Margin
Also found in your P&L statement, the gross margin is the difference between your revenue and the cost of goods sold (COGS). This number is a measure of profitability that shows you what your company made after paying all the direct business costs. By tracking the gross margin, you can identify where to reduce costs and improve your pricing strategies.
Accounts Receivable and Payable
Managing your cash flow better involves monitoring your accounts receivables and accounts payable. Accounts receivable refer to the amounts owed to your business by clients for goods and services you sold on credit. On the other hand, accounts payables are the amounts your company owes to your suppliers or vendors.
Tracking your receivables and payables help you prevent potential cash flow issues, improve your billing process, manage your collections, negotiate better terms with your vendors and avoid late payments.
Return on Investment (ROI)
ROI is the amount of profit directly associated with an expense or a group of costs. If your company, for example, purchases equipment, tracking its ROI will allow you to evaluate your investment, helping you make informed decisions on your future spending.
Let me repeat it – business is all about numbers. If you don’t want to fly blind, your best chance of knowing what’s happening in your business is to review your numbers. By tracking these critical numbers, you can gain valuable insights, identify areas for improvement, and make informed decisions to move toward your goals.
We can help you understand what your financial data tell you so you can gain clarity and make actionable strategies. If you’re ready to talk numbers, contact our team at Cloud CFO.