Coaching Tips

Do you know the numbers in your business?

Business is a numbers game so it is imperative for those in business to know their numbers. Without knowing the numbers it is impossible to make key business decisions about business expansion, marketing, sales, employing new staff, staff performance etc.

So what are the numbers? The key numbers in any business are

(i)     Accounting

(ii)   Break Even Point

(iii) Sales/Marketing

(iv)  Conversion Rates

(v)    Revenue

(vi)  Margins

The first set of numbers crucial to any business, are the financial numbers. This includes being able to read and understand a profit & loss statement and balance sheet. To do so we need firstly to understand accountancy jargon.

How good is your knowledge on accountancy jargon? Try the test below.

  1. A balance sheet shows

(a)   Balance between income and assets

(b)   The profit in a business

(c)    The net worth of a business at a specific time

(d)   Balance between sales and costs

  1. An account payable is

(a)   A liability

(b)   A prepaid expense

(c)    A credit

(d)   Owner’s equity in the business

  1. Which of the following would you find on a profit and loss statement.

(a)   Fixed asset

(b)   Accounts payable

(c)    Repayment of debt

(d)   Depreciation

  1. The bottom line in accountancy terms means

(a)   The business has hit rock bottom and is preparing to go into receivership

(b)   Net Profit

(c)    Gross Profit

(d)   Gross Margin

  1. Which of the following is most important to the daily operations of a business

(a)   Sales

(b)   Profit

(c)    Cash

(d)   Margin

  1. A balance sheet shows

(a)   Cash

(b)   Assets

(c)    Equity

(d)   All of the above

  1. Nett Profit Equals

(a)   Sales less Cost of Goods

(b)   Gross Profit less expenses

(c)    Sales less gross profit

(d)   Gross profit less tax.

  1. Which of the following does not affect the cash position in your business?

(a)   Motor Vehicle Expense

(b)   Wages Expense

(c)    Legal Costs

(d)   Depreciation Expense

  1. A basic accounting equation is.

(a)   Assets =Liabilities + Owner’s equity

(b)   Net Worth = Assets + Profits

(c)    Gross Profit = Sales – Nett Profit

(d)   Nett Profit = Credits – Debits

10.  A prepaid expense is

(a)   A Liability

(b)   An Asset

(c)    Equity

(d)   A Debit

Answers are to be found at the end of the article. If you have a score less than 8/10, it would be worthwhile having your accountant explain

(i)     what is a Profit and Loss Statement and how it relates to your business,

(ii)   what is a balance sheet

(iii) how to understand the numbers in both.

Break Even Point is another important number to know when running a business. To know what breakeven point is for the business, the numbers to know are

(i)     Sales

(ii)   Cost of Goods

(iii) Profit Margin

(iv)  Fixed costs/Expenses

A business’s breakeven point is where

(Sales X Profit Margin) – (Cost of Goods + Expenses)  = 0

Sales

What are the important numbers needed to for sales?

To establish a sales budget, there needs to be a sales process.  The first step of this process is marketing which is utilising different strategies to generate leads or enquiries. The marketing numbers are;

(i)     What are the number of leads generated from each marketing strategy

(ii)   What are the most effective marketing strategies

This is simply achieved by testing and measuring each strategy. For example if cold calling is a marketing strategy, how many calls are needed to generate a lead. By testing and measuring over a set period of time the number of leads generated will be directly related to the number of calls made. By testing and measuring each marketing strategy, it is easily determined which strategies are working and which are not.

Once the number of leads generated are known, the conversation rate for each step of the sales process needs to be known, ie what is

(a)   the conversion rate of leads/enquiries to appointments,

(b)   the conversion rate of appointments to quotes,

(c)    the conversion rate of quotes to sales.

Quite often the sale is lost at a certain point in the sales process. Knowing these numbers will determine that point.

Revenue

Revenue is the average dollar sale multiplied by the number of sales made. However since sales are determined by the number of leads multiplied by the conversation the amount of revenue generated is influenced not just by sales but by lead generation, conversation rates, average dollar sale and the number of transactions.

By changing either one or all of these numbers has a direct impact on revenue. eg

Leads                                       1000

X                                                X

Conversation Rate                  10%

Sales100

X                                              X

Average Dollar Sale                $100

X                                             X

No. of transactions                 5

Revenue$50,000

With just a 10% increase on each of these numbers has a the following effect on revenue

Leads                                       1000    x 10%   =  1100

X                                                X                          X

Conversation Rate                  10%     x 10%   =   11%

Sales100121

X                                              X                             X

Average Dollar Sale                $100    x 10%   =  $110

X                                             X                             X

No. of transactions                 5          x 10%   =    5.5

Revenue$50,000$73,205

Margins

There are various areas of margins in business. Total business profit margin, product profit margins, job margins etc., whenever profit margin is being calculated, it is essential to understand what numbers are included to determine a true profit margin. In many instances the profit margin a business believes it will make is incorrect because of “hidden” costs not taken into account.

For example, trade based businesses may quote on an hourly rate where the hourly rate is the direct cost of labour plus their on costs and a profit margin. However, the hourly overhead rate or supervision costs are often not taken into account.

Successful retailers will have a square metre floor space cost built into a products profit margin based on the number of times the product is turned over annually. If a product just sits on the floor then the profit margin for the product diminishes over time.

Many businesses do not understand the effect of discounting prices. DISCOUNTING CAN HAVE THE GREATEST IMPACT ON PROFIT MARGIN, eg if a product is sold for $100 and has a 20% profit margin ie $20, by offering a 10% discount a business must double it sales to maintain the same profit margin

Without accurate profit margins it

(i)     is impossible to calculate business breakeven points

(ii)   is difficult to plan for expansion, ie when to hire new employees, purchase capital equipment etc

(iii) is impossible to calculate the true value of the business, especially when looking to sell

(iv)  often leads to financial difficulty.

There are other numbers which are also necessary to run a successful business such as percentages, growth figures, etc, but most important of all is to

KNOW YOUR NUMBERS.

Answers to the Accountancy Jargon Test

1.(c)                 2.(a)                 3.(d)                 4.(b)                 5.(c)