The ABS estimates that 53 per cent of small businesses fail within the first five years. But keeping your business out of these statistics is simple – you just have to know your numbers, explains Peter Sarai.
A successful business owner will have a strong understanding of the numbers that drive their business. They will be able to track when sales are slow or if the list of debtors is increasing, and react to it. They will be able to forecast cash flow and allocate working capital to proper levels. The most important numbers for all business owners to know in terms of their business is as follows.
Working capital: Working capital is cash that funds the daily operations of your business. It ensures that you can pay your invoices and debts as they fall due. Working capital is essential during the start up period. Allocating the appropriate level of working capital varies by business size and industry. However a general rule of thumb to calculate working capital for your business is:
Working capital ($ value) = current assets – current liabilities.
Revenues: Track your sales on a weekly, monthly, quarterly and annual basis. Compare these with your marketing and sales plan to ensure you are keeping on track.
Gross profit: Gross profit is a strong indicator of the financial health of your business. Likewise, it is the rule that you can implement to maintain mark-ups and profitability. The gross profit on your product or service provided is calculated by:
Sales – Cost of Goods Sold = Gross Profit.
Profit margin: It’s amazing how many businesses do not track their profit margins. This is the key indicator on whether your products or services are generating enough income to cover your overheads and deliver a profit. To calculate your profit margin, subtract your general and organisational expenses from your gross profit.
Overheads: Most people think they know the cost of their overheads. However it is only when the final accounts are prepared that the true overheads are known. In many cases they are far higher than anticipated, and result in a shock. The seat of the pants method simply doesn’t work here. This is why monthly or quarterly accounts are a must to know what the real overheads are for a business.
The reason for being in business: Most people when they start a business have an expectation of a level of income they want to earn. Yet in truth very few earn anything like what they wanted at the beginning. But it doesn’t have to be that way. Instead of allowing yourself to be bounced around like a cork in a bathtub, sit down and re-work your numbers. Work out your break-even, your gross profit and your overheads. Then decide what income you want from your business and work backwards. Calculate the turnover you need to achieve the net profit you want. Do this several times until you arrive at a realistic set of goals.
Running a business is not hard if you know how. It means focusing on management rather than being caught up with what the business does. It’s working on your business rather than in it. Don’t allow yourself to be a business statistic. Don’t be one of the 47 per cent that fail.
Peter Sarai is Founder and Group Managing Director of Modoras.
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