Financial 101
Planning for Success

Knowing your Business Numbers – Financial Reports 101.

When I say “knowing your numbers” – what’s the first thing you do?

Do you get excited because you know knowing your numbers is the way to success and freedom?

Or do you instantly feel sick, ashamed, anxious, worried, or any other of the multitude of negative feelings because you know you don’t know yours and you know it’s impacting on your business and your life?

I completely understand your feeling and pain because I have been there myself, and I have to say, many businesses – even the successful ones you see on Instagram – still have moments of weakness. Why? Because business is a human entity.

You don’t need to be watching absolutely everything when it comes to your numbers – but what you must do is learn how to interpret your reports, so that when your accountant sends you a Balance or Forecasting sheet you know what they are talking about at a high level. You will be able to go back to them and ask for certain reports so you can keep an eye on each area of your business and how it’s performing.

So when someone next says to you – do you know your numbers, you can say YES because you know exactly where your business is right now, how much money you are making, how much is going out in expenses each month, and the growth areas you need to focus on – AND everything is organised so if you ever need to know anything you can pull a report yourself or you can ask your accountant or bookkeeper to do it for you. That’s the meaning of knowing your numbers.

Knowing your Numbers can be a tedious process;

I understand that growing your business can be hard. And understanding your numbers, having KPIs and goals, and actually getting the work done is also hard.

But when I’m having a tough week, there is nothing more satisfying than being able to pull up my Profit and Loss Statement to see where things stand that month – and so I know the hard work has been worth it!

Knowing your numbers will make your hard work feel worthwhile too.

I can see that I’m achieving the goals in my business plan and it feels good.

Reporting is part of the process of achieving your goals and dreams and being successful in business. It’s whether you get a gold star or not!

Knowing your numbers is about doing all the right things, ticking the boxes, and hitting your targets.

Here is a breakdown of the terminology so you can confidently have a conversation about your business and the reports involved.

Financial reports: How to interpret them.

Profit & Loss:

This shows whether the business is making or losing money (assuming all income and expenses have been received and paid in full at any given point in time).

Important points to note:

A Profit & Loss report can be shown both on a cash basis or an accrual basis

  • Cash Basis – Shows only income and expenses ‘actually paid/received’ from your bank account.
  • Accrual Basis – Shows all income include invoices that are still owed to you (Debtors or Receivables) and shows all expenses including bills (Creditors or Payables) that you are yet to pay.

Trading Report:

This is a snapshot of whether you are trading at a sufficient margin to cover fixed overhead costs and to provide the desired return to you as the owner. (Refer to Gross Profit and Cost of Goods Sold below).

Cash vs Profit:

The difference between profit and cash:

Cash – the amount of money currently or soon to be available in your bank account (you have been paid!).

Profit – the amount of net income showing on your profit and loss report.

Items that affect your cash but don’t reflect on your profit and loss report include:

  • Loan repayments
  • Increases or decreases in stock and WIP levels
  • Slow customer receipts
  • The speed at which suppliers are paid
  • Asset purchases
  • Drawings
  • Tax payments

Balance Sheet:

This is essentially a statement of the net worth of the business at any given point in time (assuming all assets and liabilities are measured at market value).

Assets – include amounts that are owing to you (Trade Debtors) or the value of your assets you have on hand (ie plant & equipment, motor vehicles etc).

Liabilities – include the amounts that you owe to others and include:

  • GST
  • Super
  • Tax
  • Trade Creditors (Suppliers)
  • Loans

Key Performance Indicators (KPIs):

A KPI is a way to measure that your business is achieving the targets and goals set. KPI’s are therefore selected inline with what your current business objectives are and can include:

  • Gross Profit %
  • Sales Revenue
  • Lead Conversions
  • Debtor Days

Cost of Sales or Cost of Goods Sold:

Cost of Goods Sold (COGS) are the direct expenses that relate to creating and selling your goods and services. These are also called variable costs as these costs vary depending on the level of goods and services that you are producing or providing.

Gross Profit:

Gross profit is the amount the business has earned after subtracting the cost of sales (COGS) from the sales revenue.

Gross Profit %:

You calculate your gross profit % by dividing your Gross Profit amount by your Sales Revenue. The higher your Gross Profit % is, the more money (or margin) you are making on the sales of your goods.

Markup Percentage:

To calculate your markup on the goods you are selling: (Selling Price – Cost to Produce) / Cost to Produce = Markup %

Net Profit

Net profit before tax is the total earnings after subtracting all expenses (everything), including business operation and depreciation on assets.

Do you need help with areas of your business?

Understanding the financial aspects of your business is imperative to its success and longevity. If you are a business owner and you’re struggling to know your numbers, please let us help you. It’s time to take back control and get some help and get your business on the right path. Contact Brenda and the team today.

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