Why should I know my numbers?

The one thing that the most successful business people have in common is that they know their numbers and are on top of them.

As you can imagine, our Worcester Accountants meet lots of different business owners, different industries, different personalities and different attitudes to their business. There is one thing, however, that the most successful business people have in common and that is that they know their numbers and they are on top of them.

But why are they are so important and what can knowing them do for you?

Imagine deciding to go out in your car but you have no destination in mind. You set off and at the first junction, you don’t really care whether you turn left or right, as you don’t know where you’re headed. You head left, but there are roadworks which hold you up for 30 minutes. You feel irritated by this as you could have avoided them by turning right, but you didn’t go right as you didn’t have a plan in mind. You continue along the road and see a sign to the motorway. Do you take it? It will get you there quicker, possibly, although you don’t know where “there” is, so it could take you in completely the wrong direction.

Do you see where this is going?

Without a clear destination in place, you can’t put in place a plan. A plan in the above situation would have missed out a 30 minute delay in roadworks and you would know whether the motorway was a good option or not.

Your destination can be anything and it doesn’t have to be a 15 or 20 year plan initially, but you do need to have that first starting point. So, make yourself a coffee (or pour a glass or wine, depending upon your preferred tipple), sit in a quiet room and close your eyes. What do you want from life? What do you want to achieve? What experiences do you want to give your family? Where do you see yourself in 12 months, 2 years, 5 years?

Will you be living in a bigger house, driving a sportier car, have a holiday home, taken your kids to Disney or Lapland or simply paying someone to do your ironing? Whatever those dreams are, they are your destination and you need to write them down. I have created a dream board with pictures of the things I want to achieve, the places I want to go.

Once you have done this, you can now work out how much money you need to be earning each month to achieve this. Once you have done that, you can work out what your business needs to be achieving as its net profit to provide you with this income.

Here’s where the importance of knowing your business’s numbers comes in.

You need to know what all of your overheads are each month, each week or each day, depending upon your business (these are the costs which are not directly impacted by the amount you sell, such as rent, accountancy fees etc). Add these back on to the net profit figure your business needs to achieve for you to be at your destination.

Next, you need to know your gross profit margin. To calculate this, you first need to work out your gross profit, so deduct the cost of your sales (this are the costs which are directly linked to your sales, for example, purchase of stock), then divide your gross profit by your sales figure and this will tell you what your gross profit margin is.

So, once you’ve added all of your overheads back to your net profit, this gives you the gross profit. Divide this by your gross profit margin and you now have the amount of sales you need to achieve to reach your goals.

Once you have this figure, you can now put a plan in place to start you on your journey. You can then keep a track of these numbers to know that you are making progress in the right direction. Knowing these numbers will help you make decisions, left or right, motorway or not. They will help you make good decisions and more importantly, help avoid making bad ones.

Every decision you have to make in your business, you can ask yourself the question, will this get me one step closer to my destination? You will also have valuable information at your fingertips. For example, let’s say you engage in a marketing campaign. By tracking these numbers, you will be able to see very quickly whether it is having a positive impact upon your business, or whether you should change track as there is no benefit.

Having a great accountant working alongside you also helps, of course! So long as you can tell me your destination and how much money you need each month to achieve this, we can work out the rest for you. Once we’ve done the calculations, it is then time to look at how you are going to move your sales forward each month and putting a budget and cashflow forecast in place to help you monitor this. Our accountants will then meet every month or quarter to review this and look at what has worked well, what challenges are being faced to help you get to your destination.

Contact our accountants

If you would like to know more about how we can support you and your business, please don't hesitate to contact our accountancy. Partner with a team of professional Accountants & Tax Advisors that are highly-reputed across the West Midlands.

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