Running a business is relatively easy when you can store all the key numbers in your head.
However, as a business grows and more people come into the organisation, processes become more complex and the owner/manager has to rely on numbers and trends to keep in touch with what’s going on. Managers need to have reliable numbers on which to base decisions, although the numbers can never be a substitute for good management.
Ian Ross, Interim Manager and associate trainer for The Skills Company, gives his view on the ten numbers needed to manage a business.
- Sales excluding VAT for the week or month to date and how far these are away from your estimated breakeven sales. If the sales are lower than expected, don’t be tempted to “steal” turnover from a future period, just to make the numbers look better. This is self-delusion and will catch you out in the end.
- Gross margin (also called gross profit) percentage enables you quickly to work out what margin you have to cover the fixed costs of the business.
- The total of the fixed costs in the business. The fixed costs are those that do not vary with the level of output and often include management salaries, rent and insurance.
- The business bank balance less the known payments in the coming week or month. (A better measure, although more difficult to obtain, is the amount of ‘free cash’ the business has. The ‘free cash’ is the cash flow remaining after all expenditures required to maintain or expand the business have been paid)
- The quick ratio or acid test (calculated as, trade debtors plus cash, divided by current liabilities). The ideal ratio is 1 or greater, however, some industries do manage on lower ratios.
- Your biggest debtors, who they are, what they owe and who is doing something about collecting that cash, along with the telephone number of the MD of those key customers.
- DSO or Days of Sales Outstanding calculated as (trade debtors times 365) divided by (sales turnover plus VAT where applicable). If the trend in this ratio is increasing, then some action needs to be taken to check your processes for accepting orders, credit checking and debtor chasing.
- If you have a business where you have products to sell, then customer-facing measures like OTIF (the % of orders that are completed and shipped on time and in full), number of complaints, number and value of credit notes, number of customer complaints can be helpful.
- Some measures of waste, for example the % of products rejected and the £ value of waste.
- The mobile telephone number of your accountant, in case you need advice on an important matter or someone to talk to (it’s lonely at the top).
For details on our Understanding Business Finance workshop, please click here.
He is a qualified Chartered Management Accountant and has worked as a financial professional or interim problem-solver in businesses of many sizes and sectors (including manufacturing, distribution, services and not-for-profit). Ian delivers practical and engaging sessions that bring dull and financial concepts to life.