The Importance of Knowing Your Numbers
October 08, 2018
Sales, amount of cash in the bank, labor costs, current accounts receivable aging, and average client ticket amount are all examples of financial measures that could be important for a business owner to know and quickly recall. These measures could be different depending on the business and industry.
One of the most important of these financial measures is gross margin, or top line margin as it is sometimes called. Basically, gross margin is the profit that is left over when you subtract your cost of goods (or service) from your sales. It is the profit used to contribute to covering fixed costs in order to have enough left over to yield a net profit, or bottom line profit as it is often referred to.
So it is vital to maintain your gross margins so as to ensure a good net profit. One should compare their gross margins to the standards in their industry to see how they compare with the average. Unfortunately, when asked what their gross margin percent is, some small business owners have difficulty recalling. It can be challenging to maximize profits when one lacks this financial measurement knowledge.
A commonly used analogy of the three-legged stool can partly explain the reason for this lack of knowledge that is common to some small business owners. One leg of the stool is technical expertise in their field, in which most small business owners are experts in their field. They have the expertise to effectively make what they sell or service. This leg is usually very stable. The second leg is the marketing leg. Do they know how to sell what they make or service? Overall, many small businesses have a pretty good handle on their market, customers, and competitors and know how to effectively reach them. They sometimes need professional help in fully understanding their market and marketing choices and how to conduct their marketing efforts efficiently and cost effectively.
The third leg of the three-legged stool is usually the less stable leg. This leg involves the financial, HR, legal and overall management part of the business. Some small business owners pay less attention to it because they are better at the making and selling, or the technical and marketing. The third-leg primarily involves the financial aspect of the business, an area that some small business owners avoid because they do not understand it well, they cannot find the time for it, or they may prefer to pay others to handle it for them.
Help is available to small business owners to help shore up the third leg of the stool. Your CPA and bookkeeper can help educate you and provide the necessary financial information you need to help maximize your profits. The ASU SBDC provides many seminars and workshops that provide education in the area as well. In addition, they offer no-cost and confidential advising on this topic from certified business advisors. Keep in mind that good financial records are the key to managing the finances of a business.
Business Tips” was written by Mr. Dave Erickson, Director and Certified Business Advisor IV, of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU · SBDC, contact him at David.Erickson@angelo.edu.