Business & Executive Coaching | ActionCOACH iNala

Master Guide to understanding finance as a Business Owner

Here at ActionCOACH Inala, we are on a mission to provide business owners with free access to our knowledge base around owning a successful business. We define a successful business as an enterprise that works to make money without you. Most business owners we work with come to us as the hardest working, last to get paid by their own business. Our coaches help them change that, so the business is working for them, not the other way around.

We are happy to provide our experience wrought knowledge, because of our core value of abundance. We believe that the world, and particularly our country South Africa, is an abundant place. Our vocational purpose is to help business owners tap into this abundance.

In this article, we will outline the answers to the question:

What numbers are important to know in my business?

The language of business is language and accountancy. Some business owners think that if they employ an accountant, they do not need to speak this language themselves. They shy away from their own numbers.

If you are a business owner, you need to speak this language, because that is how you know how well your business is doing.

It is not as difficult as you would think. You don’t need to know the ins and outs of accounting, just key metrics that we will discuss in this article. If you are employing an accountant, you are doing so, so that they can communicate these numbers to you in a way you can understand.

You will be surprised by how interesting these numbers will become to you...

So what numbers are important?

Think of it like your business is a car you are driving. There are three indicators giving you the information you need to know:

You look at the speedometer to see how fast you are going
You look at the fuel gauge to see how far you can still go (what’s in the tank)
You look at the temperature gauge to see how well your engine is performing.

The Speedometer: Profit and Loss Statements

The Profit and Loss Statement, also known as the Income Statement or Management Accounts, tells you

How much you’ve sold

How much you make after you’ve paid for the costs of the goods and services you’ve sold. For example, if you made a pen for 5 rand, and sold it for 10 rand, you’ve made 5 rand. This is your gross profit.

What other expenses you must pay. These are fixed expenses and variable expenses. The larger fixed expense is usually your salaries.

Your profit after all expenses (net profit).

More information you can get from the income statement is:

Cost of Sales. It is important to understand what percentage of your invoices (sales) is left over as gross profit in your business. It’s important to know what you’ve paid to produce the items.

These figures make up your fuel gauge. They tell you how well you are doing; how much you are progressing, and how fast you are progressing in the direction you want to go.

Fuel Guage: Cashflow

Cash is like oxygen for a business. If you run out of oxygen you die. If you run out of fuel you can’t go anywhere, there’s no speedometer, there’s nothing else. You stop.

In business you could be producing and making a lot of money in terms of your profit and loss but have no money in the bank.

There are some critical areas that contribute to this. They are what is known as “work-in-progress".

Your customers are being invoiced, but your collection of those invoices is slow. This is known as debtors. If your customers aren’t paying you and you owe more and more money, you are going to run out.

A business’s money can also become tied up in stock. If you have ordered a whole lot of stock and haven’t sold it, you have paid for it and haven’t made that money back yet.

You’ve invoiced for a job, but the job isn’t completed. You must finish the project before getting paid out in full, but over the course of the time it takes to complete the project you are spending money.

You are growing your business. For example, you’ve hired a new salesperson, and they aren’t giving a return on your investment yet. Growing a business bleeds money.

Understanding this cash gap is critical. Finding ways to close this cash gap in your business is a very important thing to know how to do.

It is good practice to have at least three months of expenses of cash stored away in an accessible account. This will allow you to be strong and resilient, in the face of any upheavals.
Another method of managing the cash gap is to use a tax account. This is an account where you put 10% of sales, so that when the VAT man comes calling, you have the money to pay him.

Temperature Gauge: Balance Sheet

Your balance sheet shows you the health of your business. It tells you:

What are you owed? Asset.

What do you owe? Liability.

This is differentiated further into the short-term and the long term.

Here are some examples:

Short term Liability: Creditors (people who owe you money)

Long-term Liability: Bond

Short term Asset: Debtors (people who owe you money)

Long-Term Asset: Property

Your balance sheet tells you how much money. It shows you your retained income. If you are looking to sell your business, retained income will be looked at to see if the business is making any money.

Other useful numbers

Depreciation is often overlooked as a figure. Depreciation is how companies spread out the cost of things they buy, like equipment or buildings, over the time they use them. It's like saying, "Hey, this machine we bought is going to help us make money for, say, 10 years. So, instead of showing all the cost in one year, we'll spread it out over those 10 years to match the value it provides over time." This helps them to show a more accurate picture of their expenses and profits each year. If you do not take depreciating assets into account, you will over value your business's assets.

The difference between mark up and gross profit. Many business owners think this is the same thing. This is a big mistake. Your mark-up is always a higher percentage than your gross profit. If someone buys something for R100, and they mark it up and sell it for R150, they think they are making a 50% gross profit, but they aren’t. Mark-up is a percentage of cost price; gross profit is a percentage of selling price. Going back to the example, the mark-up is 50%, but the gross profit is 33%.

Breakeven. The breakeven point tells you what to sell to cover all your expenses. It is a useful figure if you want to produce a new product. The sum is: all expenses/gross profit percentage. That will tell you what your sales need to be to break even.

If your expenses are 100 000 and your gross profit percentage is 40%.

Breakeven = 100 000 divided by 40%

= 250 000

So, this business must sell 250 000 products to breakeven.

Profit Breakeven. Another figure we encourage our clients to look at is their profit breakeven.

The formula for this is:

Profit breakeven = (Expenses + desired profit) divided by gross profit percentage.

This figure will tell you how much you need to sell to make what you want.

Breakevens are useful indicators when onboarding staff or expanding your business to any degree. They show you what your sales need to be to cover your costs.

On average what does a customer spend with you. On average how often does a customer spend with you. These aren’t strictly accounting numbers, but they are useful to know.

What numbers are important to know in my business?

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