Dealing with the numbers in your business can be very overwhelming.
You might be thinking: “If I don’t know the numbers in my business, that’s not a problem because I can’t see them.” But those numbers are still there.
There are three key numbers you need to track in your business in order to grow a successful business: sales, profits, and cash.
You don’t have to do this yourself. Your bookkeeper — and you should hire a bookkeeper — can do most of this for you.
What you track grows.
Sales are the lifeblood of your business. No sales, no business. Period.
Start tracking your sales at least once a month. Break it into your top three products or services.
Ask your bookkeeper to make them line items on your profit-loss statement. That way you will be clear on how your top three offerings are performing. Also track the drivers that affect sales. For example:
- Growth of your email list
- Sales conversations you have per week
- People visiting your website
- Speaking engagements you have
Create an Excel doc to track the drivers of your sales. Do this every week. Make it a game. Remember, what you track grows!
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Sales are important, but it’s just as important for your business to make a profit. There is only so long your business can last if it doesn’t make money.
Shoot for a profit margin of 10%.
Sales minus expenses equals profits. Some business owners pay themselves a salary that is part of their expenses. But if you just take a draw (distribution) from your business, this won’t show up on your profit loss statement — so add any distributions back into your expenses. This will make sure you have a clear picture of your profit margin.
Aiming for a 10% or higher profit margin will force you to keep your spending in check.
Here’s an example. Stay with me!
Your business does $100,000 in sales and has expenses of $40,000.
So your profits are $60,000.
You don’t take a salary, but every month you move $5,000 from your business account to your personal account to cover your living expenses — which adds up to $60,000 a year in distributions.
If you were to add back in those $60,000 of distributions and think of them as expenses, your profit would now be zero. $60,000 in profits minus $60,000 in distributions equals zero.
The goal is a 10% profit margin on sales of $100,000, which is $10,000. So in this example, you could only withdraw $50,000 to your personal account per year to keep your profit margin instead of the $60,000 you’ve been taking. $60,000 in profits minus $50,000 in distributions equals the $10,000 profit goal.
Do you ever ask yourself, where did all the money go? Time to figure that out. Cash flow means many things to business owners.
- How much money you have at the beginning of the period
- How much money you have at the end of the period
- What happened to the difference?
The most common causes of changes in your cash balance are:
- Net income — your profits
- Money you withdraw from your business account
- Tax payments
- Payments toward debt
- Investments you make
Ask your bookkeeper to track this for you and you can find it in your cash flow statements. This is why hiring a bookkeeper is so important.
Make a goal to keep at least two months’ of business expenses in your business account. If that seems like a stretch, start with one month.
This will make you think twice about wasting money in your business. Remember — cash is king.