The importance of knowing your numbers

The ultimate goal of a start-up is to be successful, profitable, scalable and saleable.

 

The first few years are typically the toughest time for any business and the level of profit, if you are lucky enough to have any, is usually low to none.

 

One of the main issues that we come across on a day-to-day basis with start-ups is that they just don’t know or care enough about the numbers, especially the critical ones.

 

Once you have been running profit and loss, budgets and forecasts for as long as we have, it becomes second nature. But for the start-up and new business owners out there, this is something you need to learn and take the time to do on a weekly basis. Running your numbers keeps you accountable and will help you sleep a bit better at night.

 

It’s simple. Money comes in. Money goes out.

 

Everything costs money, just opening the door (rent), charging your computer (electricity) and making a coffee (coffee beans, milk, water and optional sugar) costs money. These are all classed as your overhead costs.

 

There are fixed costs, direct costs and variable costs. Overhead costs are usually fixed; direct costs are usually related to the cost of what you are selling – if there isn’t a sale, there isn’t a cost.

 

Your profit, of course, is simply the sale price minus the direct cost to you, which gives you your gross profit, and then you need to reduce this by your overheads, including any tax payable. What you have left is your net profit after tax, and of course you want that number to be as high as possible.

 

This, then, becomes the basic formulation for your profit and loss statement, as well as knowing the financial performance of your business.

 

If your start-up is getting some traction and you are generating a lot of leads or sales, you need to know your numbers to make sure that you are just not generating a lot of cashflow with no profit.

 

This happens all the time with small businesses and start-ups. One of the critical numbers you need to track and understand is the cost of customer acquisition, which includes your direct marketing costs, as well as the hidden costs of freebies, mates’ rates and non-chargeable time.

 

For example, we are working with a client that came to us because she really loves running her business but isn’t very good with the numbers. Her main concern was that she and her team were working around the clock but barely making enough money to pay all the staff.

 

We start with some really simple questions: Is your pricing model by product or by hour? She replied both.

 

So we decided to look at the company’s “by hour” charges first. She charged $150 per hour for the company’s services. When we started to dive deeper into her numbers, she was very surprised to realise that the fees were not $150 per hour per staff member, as she had three people working on most jobs. Plus there were the briefings, meetings, feedback and general client service.

 

Taking these into account, she was effectively charging $25 per hour per staff member. This, of course was a shock to her, and led to her realising that all the hard work they were doing, was actually resulting in more cost than profit. Not knowing these critical numbers has impacted her profit and happiness greatly.

 

From the outside, it seems ridiculous that people don’t look at something so simple closely. A lot of businesses don’t know these simple but critical formulations.

 

To get you on track, you just need someone outside of your business to look at you. This includes looking at your numbers, assisting you with budgets to make sure that you are on track and operating your start-up as profitably as possible.

 

Over a planned period of time with milestones and goals, we worked on a profit improvement strategy with that company and helped her package up the company’s services, streamlined her costs and reduced her overheads. Now, six months later, she is successfully charging out every member of the team at $150 per hour, which has tripled her profit margins without acquiring new clients or doing any marketing. This, in turn, increased her profits on the packaged services.

 

Sometimes it’s simply knowing the inner workings of the numbers of your company that can increase your profits, which can then lead to you being able to focus on acquiring new clients, leads or sales.

 

This is a situation that we see with new business owners all the time. So make sure you surround yourself with great numbers people, who can analytically look at your numbers, share and mentor you in how these numbers work and make sure you are getting the most profit for all your hard work.

 

Tips on knowing your numbers

 

  1. You need to know what money is coming in and going out of your business, collectively with your finance team and business mentors.

 

2.   Set up an accounting system to track your critical numbers, and make sure you look at them weekly. There are a number of inexpensive cloud-based accounting programs that you can use or sometimes a simple excel spreadsheet will suffice.

 

3.   Take the time to really work out what profit you are making on your product/service. This is will surprise a lot of you.

 

4.   Making more profit, can easily be achieved by knowing your numbers and constantly tweaking your overheads and your costs before you even think about marketing and acquisition.

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