5+3=8
You will be in control of your business is you know you five profit and loss account numbers and your three cash flow calculation numbers.
Profit & Loss
The five numbers you need to know about each month for your profit and loss account and to ensure you remain on track are:
Turnover – The total value of your sales for the month
Cost of sales – The cost to deliver the sale, it includes things like the cost of labour, materials and plant.
Gross Profit Margin – This is your turnover less your cost of sales. Gross margin can be used to measure your performance. The greater the gross margin the more cost you are taking out of your sale. When you know this number to can keep a check on it to make sure it stays within your agreed band of performance, if it drops you know you may have a problem.
Overheads – Overheads are normally your office costs, and include insurances, stationary, utility costs, rent, training, and management salaries. Some businesses put all their costs into overheads and have no or little cost of sales. This is done normally in service type companies like architects, solicitors and the like.
Net profit – This is gross margin less overheads and represent you business performance. You will be taxed on this figure.
Putting it all together So really there are only three numbers you can control
- Turnover
- Cost of sales
- Overheads
Your job is to know these numbers, as then you will be in control.
Cash Flow
The three numbers you need to know about to control your cash are:
Current bank balance – This is easy, the amount of cash you currently have in the bank
Aged Debtors – How much cash is due in
Aged Creditors – How cash is due out
Knowing these numbers you can then work out when the cash is due in and when the cash is due out, this in effect is your cash flow forecast. You can enter the data into a spread sheet and then be in control
My recommendation is you carry out an update of your cash flow each week to keep it up to date and once per month after you receive the latest aged debtor and creditors reports from your accounts package, to ensure you are working with the correct numbers.
Keeping on top of your numbers will help to keep the stress out of your life, because they will tell you what to do and when. You can’t make the correct business decisions if you don’t have the facts.
Bob Evans, CEO UK, FREEDOM Business Coaching Ltd