Why you need to understand your numbers

Why you need to understand your numbers

Over the years, we’ve seen our fair share of busy business owners fall into the same trap.

They get so wrapped up in their day-to-day activities that they forget to take a step back and look at the bigger picture. Where is the business going? Are there any opportunities on the horizon? And which threats are lurking in the shadows?

Often they’re so focused on working in the business, that they neglect to work on it. So much so that opportunities are missed, and threats appear with little-to-no warning.

That’s why it’s vital that you understand your numbers.

But which numbers are we talking about?

We don’t just mean knowing the number in your bank account (although keeping an eye on that is obviously critical).

As a small business owner, these are the all-important numbers you need to understand:

1. Cash Flow

Understanding and monitoring your cash flow is crucial. It’s the lifeblood of your business. Money in, money out; if you fail to track that, you could soon veer off course. Right over a cliff edge, if you’re not careful!

If the cash flowing out of your business exceeds the amount flowing in, you have a serious problem. But with a detailed and regular cash flow forecast, you’ll ideally spot such a problem far enough in advance to do something about it. A gap in your cash flow could be a sign to cut costs, raise prices, seek additional funding, or restructure the business.

2. Net Profit

A close relation of cash flow, your net profit is the result of subtracting your expenses from your income. Net profit is important as it clearly indicates whether you’re making or losing money. It’s also a good number to know as your tax bill is calculated based on your net profit. If you don’t want to be stung by a large and unexpected tax bill, get to know your net profit a little better.

3. Profit and Loss (P&L)

Also known as an income statement, P&L is a handy number to track over time. While you might be more drawn to looking at the net income figure of your business in isolation, the profit and loss statement looks at both your net income (operating and non-operating) and your expenses (such as taxes) during a specific period of time. Understanding your P&L helps you identify any challenges or obstacles that might arise in the future, allowing you to allocate budget and resources accordingly.

4. Gross Profit

Sometimes called the gross margin, your gross profit shows you how much money is left after the actual cost of your goods or services is subtracted from the sales price. If this number is low and barely enough to cover operating costs, such as rent, salaries, utilities, and marketing, it could be a sign that you need to either increase your prices or cut some costs.

Put these numbers at your fingertips

After a long, hard day running your business, the very last thing you’ll want to do is plug figures into a spreadsheet trying to find and understand these numbers.

Thankfully, there’s an easier way. Integrated cloud accounting software such as Xero can grab your income and expenses via secure bank feeds and seamlessly populate reports, putting the most important financial numbers at your fingertips.

Using Xero also makes it easier to collaborate with your accountant and review your cash flow to spot opportunities and ward off threats.

Interested in giving it a go? Contact us today and speak with one of our friendly Xero experts.