By nature, the majority of business owners focus on their businesses. However, not all know their numbers last month’s earnings, today’s accounts receivables, etc. even if these numbers are essential to efficiently manage their business.
To get a better grasp on your business’ finances, accountingnorth.co.nz explains some of these crucial numbers.
Your Revenue or Earnings
You should always know what you make in a month, every quarter, and every year to efficiently compare these numbers to your overall plan and determine if your business is ahead or lagging behind.
Your Working Capital
You can use this available capital in day-to-day transactions. You can calculate this by deducting your current liabilities from your current assets. A common industry practice states that you must have between $1.50 and $2 of existing assets for each $1 of existing liabilities.
Your Gross Profit
This is your revenue minus the direct expenses of production. Preferably, you must have at least 50% or higher remaining of your sales volume after deducting your direct expenses. This will cover other administrative costs.
Your Profit Margin
To calculate this, you should deduct the total of all your administrative and general expenses from your gross profit, and then divide your answer by your sales. Put simply, a positive answer means your business is fine, while a negative answer means that you’re behind. Your administrative and general expenses are very important because you can actually control them.
Your Advertising Cost
Advertising cost is usually the biggest marketing expense. Put simply, if you don’t compare your sales to your advertising costs, you won’t really gauge the effectiveness of your advertising campaign. Compensation to employees is typically a huge expense so you have to be really smart and fair whenever you lower or raise your compensation rates. Lastly, while research and development isn’t as easily quantifiable as advertising, ensure that you regularly measure your advancement by comparing your R&D goals with the amount you’re spending.
Business owners who know these critical numbers will have a massive advantage over their competitors. Your finances tell a specific story mainly your business’s growth or lack thereof so knowing and considering the story your numbers tell you could be a vital ingredient for the long-term success of your business.
