Owning a business is a difficult task and with day-to-day activities taking over a large percentage of your working day it is often the financial strategy of your business that takes the backseat. We all know the importance of managing our accounts and ensuring that our business is running smoothly whilst making us a profit, however, many of us struggle to understand which key financial statements and numbers we need to consider.
The importance of knowing your numbers should be at the top your list of duties as a business owner, taking the time to understand key financial numbers within your business will make this task much less time-consuming.
Not only by understanding these numbers will you be able to keep your business in the black but you will also be able to predict the ongoing financial success of your business.
The 7 key financial numbers you need to know
A statement that all businesses should have, cashflow is one of the essential financial statements that you must analyse. Giving an overall view of the financial state of your business the cashflow outlines all of the money coming in and going out of your business over a given period.
By subtracting the operational expenses from the money generated through the sale of your products or services the financial state of the business is determined. If the cash outflow exceeds the cash inflow it is time to review your expenses and reduce these where possible to get your business back in the black.
2. Profit and loss
The profit and loss statement gives an indication of the companies income (including the sales and revenue) minus the expenses during a specific period of time which is usually quarterly, every six months or yearly.
Having a profit and loss statement enables you to predict the earnings of the company for the next accounting period and make realistic plans for the future such as expansion, increasing staff numbers and other business activities.
3. Net income
Closely related to the cash flow of the business, the net income is a good indicator of whether your business is making or losing money. This financial number is worked out by subtracting all the expenses, including taxes, from the income that your business makes, it is not adjusted for items such as depreciation.
One of the most important aspects of a business is sales. Without generating sales your business can’t make any improvements on your financial situation! Monitoring your sales closely is important, watching any dips could be a warning sign so it is important to keep an eye on these. Also, when sales are up, think about why this is and use this to increase the sales your business makes for a longer period of time.
5. Gross margin
Also called gross profit, the gross margin is the figure you have once the cost of your products is taken away from the selling price. If your gross margin is very small and as a result, you can’t cover the cost of your expenses you may need to increase your selling price, whilst still trying to stay popular within your market!
6. Accounts receivable ageing
A key figure within the cash flow statement and something that can seriously affect a business’s financial position. Making sales is essential however, some businesses do struggle with having debtors, accounts receivable ageing outlines all of the ageing debts that your company has. Having great sales is fantastic however high debtors means less money immediately available to pay salaries and expenses.
7. Cost of sales
This figure tells you the exact cost of delivering the products or services that you offer, this takes into consideration all expenses such as employee time, manufacturing, office space costs and anything else that may be applicable! This will give you a good idea of exactly how much profit you are making on each service/product.
Still struggling with understanding your numbers?
We understand that not only can financial statements be overwhelming but they are also very time consuming to look through and make important big decisions from – often we just want to know the numbers that matter, without all the work!
If you would like some advice on how to manage your company accounts K.A.Farr & Co. provide a whole range of accountancy services. For more information on the services that we offer contact us by calling 01704 211434 or email us at email@example.com.