THE 9 MOST IMPORTANT FINANCIAL NUMBERS EXPLAINED
Introduction Small business owners are known to carry a lot of weight on their shoulders. This goes without saying. However, because they take so much upon themselves, they lack the time to really learn about the most important parts of their business. This includes finances. Finances cannot be overlooked for any business, especially the small ones or freelancers. That’s why today we’ll look at the most important financial numbers every business needs to know.
1. Cash Flow Operating cash flow is the most important part of your business and should have all your focus. To calculate this important number: Cash inflow – cash outflow = cash flow If it’s positive, and you have more inflow (money from goods and services) than outflow (bills, loan payments, taxes, etc.), your business is doing fine.
2. Net Income Also known as net profit or net earnings, your net income is very much related to your cash flow. This is a good indicator of how your business is doing, as it will help determine if you need to adjust your business, or if you are on the right path. Your income – expenses (including taxes) = net income Knowing this number will help you determine the financial position of your business.
3. Profit and Loss Your Profit & Loss (P&L or income) statement is crucial, as it gives you a snapshot of the financial status of your business. In order to calculate Profit & Loss: company revenue – company expenses = profit or loss If this numbers comes out to be positive, that means your business has made a profit. If negative, however, your business has made a loss.
4. Cost of Revenue The Cost of Revenue helps you to determine what you should charge on an hourly rate based on what it actually costs you to produce a product or service. To calculate it: Raw Materials + Direct Labor + Shipping/Transportation Costs + Sales Commission = Cost of Revenue In order to make a profit, your charges should be higher than your cost of revenue. If it is equal or less than CoR, you should be charging more.
5. Gross Margin Also known as the gross profit, this is related to your cost of revenue. It measures how much money is left over after you’ve subtracted the cost of your merchandise or services. To calculate it: Sales price – Cost to produce good/service = Gross Margin If you are in a competitive market, your margin will be quite low, but if you have a propreity goods or high quality services, your margin can be high.
6. Total Inventory For many small businesses that sesll physical goods, it’s important to measure inventory on a weekly basis to make sure that it isn’t increasing. If your inventory is increasing, this is usually an indicator of sales problems. Measure inventory on a weekly basis Your storage costs, waste, and of course reduced profits are connected to inventory, so it’s very important that you monitor your inventory number.
7. Days Sales Outstanding This is the average number of days it takes for your clients to pay your invoices. A small number is good, as it usually means more cash flow. A larger number means you need to chase your late payers. To calculate it: payment terms * 133% > Days sales outstanding If your DSO is high, you should follow one of our many tips on how to decrease payment time on invoices.
8. The Quick Ratio This number can quickly show the financial stability of your business. You get it from your balance sheet. For the quick ratio: current assets / current liabilities = quick ratio Your ratio should be greater than 1. If your ratio is unfortunately lower, that means that you’ll need to work to improve your company’s profitability.
9. Your 20% customers This is a number that has to do with the math related specifically to your customers. Basically, sort your customers by revenue, then take the top 20%. Those are your most valuable customers. The 20% highest revenue customers Know your top 20% cater to them, and work on converting the other 80% into top customers as well.
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The 9 Most Important Financial Numbers Explained
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