Manage the Numbers

Question: I own a service business on the Cape. I am good at what I do but have a tough time when it comes to managing the numbers. Any suggestions?

Answer: Remember, you cannot be good at everything in running your business. You don’t have the time to do all either. So, first remember there are two functions of business owners that he or she cannot delegate: (1) managing the cash to assure you have enough all the time to cover your expenses (including taxes), pay your employees and pay yourself, and (2) customer relations/selling. All other functions like accounting, marketing, PR can be outsourced. The second task is to conduct an inventory of what you like to do, what you are good at and what you would like to outsource. If your financial resources allow it, then outsource what needs to be done that you either don’t have the aptitude for, don’t have the time to do or just don’t want to undertake it

You need to have a clear picture of how your business is doing. You might be busy 24/7 or close to it, but not making any money. You might be working as many hours as humanly possible and not having enough cash at the end of the week to pay your employees and yourself. So you need to manage the numbers. If accounting is not one of those tasks that you like to, and/or don’t have the aptitude, then hire a bookkeeper who can come in once a month to review your entries. The bookkeeper can cleanup the issues and make sure you have a good picture of where the business is at any one time, plus get your books ready for your accountant at tax time. Whether you do the books yourself, get a bookkeeper full or part time, get a quality software package that both you and the bookkeeper feel comfortable using.

What are the key financial statements you need to know about to manage your business?

Balance Sheet – a summary of your business assets, liabilities at a specific time. It is also known as the statement of financial condition.

Income Statement – a report to summarize your revenue minus cost of goods sold to determine your gross profit. It is also known as P&L.

Cash flow statements – sources of revenue coming into the business (where is the revenue coming from?) and where is it going to?

Terms you need to know:

Equity – what your business owns.

Debt – what your business owes and must be repaid.

Accounts receivables – money owed to you as a result of a sale from clients/customers. Accounts payables – money owed by you to your suppliers.

You also need to manage by metrics. What are the key performance indicators (KPIs) that allow you to know how healthy your business is at any one QA time? By having someone working with you to oversee the input of financial data you will find you can manage by metrics rather than by gut feel or by the seat of your pants. Some of the more common KPIs are Sales, cash flow forecasts, debts outstanding (days it takes clients to pay you), inventory days (days inventory remains in-house before being sold), Gross profit margin on sales, Profit before income tax as a percentage of sales.

What are the KPI’s you might consider?

Cash flow: where is the revenue coming from and where is it going? When is it coming in and when is it required to be paid? Having a good cash flow analysis allows you to know when to say no to something that looks too good. The local business press offered you’re a super deal to advertise with them. If the payments are due monthly will you have the cash on hand to pay each invoice? If they are due quarterly will that work better? Do you need to negotiate payment of the year’s investment during the months of March – November?

Part of cash flow management is to assure you have enough money each month to pay the state and federal taxes owed. You don’t want to wait until the end of the quarter to assess if you have enough free cash to pay your taxes. The best policy is “pay as you go.” There is always something that needs cash. You don’t want to be the small business that is closed due to failure to pay taxes whether they are state or federal

Marketing expenditures as a percent of sales. Most small businesses invest between 2-3% of sales on marketing initiatives. Some are traditional like direct mail, space advertising, radio advertising, or even billboards. Some are digital marketing, like email, social media such as Facebook, Pinterest or LinkedIn. Whatever the mix the business owner needs to have a marketing campaign plan so he/she can estimate the financial requirements per month and throughout the year. Why? To plan on the availability of the funds and to have a metrics plan in place to determine if this was a worthwhile expenditure of funds.

Profits. Even though cash flow is critical, your small business needs to make a profit to sustain itself through the long winter months where there is limited to no revenue coming into the business. Does your model allow you to make a sustainable profit?

When you think about managing by the numbers, it is a discipline that you establish and dedicate yourself to monitor. Look at your cash every morning or at least every week. What came in?

What didn’t that should have? What corrective action do you need to take? Knowing how much you have in the bank, what is owed to you when and what is due to be paid, allows you to make more informed financial decisions

Back to list of topics