Small Business – Know your 7 Key Numbers

The importance of “knowing your 7 key numbers” is a measure to a successful business.

Why is “knowing your 7 key numbers” an important thing to understand for any small business?

Simply, “knowing your 7 key numbers” is a basic concept of knowing what you can measure you can manage.  The top three reasons why small businesses fail are due to poor financial management, poor accounting and lack of management experience.  So how do you recognise the warning signs?  Your 7 key numbers let you know where your business stands.  You can manage and change your strategy and therefore, improve your outcomes, before they become a problem.  Knowing your 7 key numbers will keep you on track for a successful business.

As a guideline the 7 key numbers to be aware of are as follows:-

1. Sales – accurate sales figures are the first indicator of business trends – whether increasing, decreasing or flat-lining they give you a clear indication of where the business is heading.
2. Gross Profit Margin as a Percentage of Sales – the percentage indicates the price you charge your customers against the prices your suppliers charge you.  An increase is favourable, a break-even point or a decrease rings alarm bells as losses are indicated.
3. Profit before Income Tax as a Percentage of Sales – ideally this figure should increase, a flat line may be acceptable for a period, but a decrease is a warning sign for further losses are indicated.
4. Cash Flow Forecasts – In simple terms the calculation is: Cash in the Bank plus cash coming in over the next four weeks minus cash going out over the next four weeks.  This indicates any cash shortfalls over the next four weeks and the ability to pay your bills at the end of the month.
5. Debtor Days Outstanding – the average days it takes for your customers to pay your invoices.  The calculation is:  Accounts Receivable/Sales x 365.  A decrease is a positive sign whilst an increase is an issue as it will impact on your cash flow and the growth of your business.
6. Creditor Days Outstanding – the average days it takes you to pay your suppliers.  The calculation is:  Accounts Payable/Purchases x 365.  This needs to be monitored in conjunction with your debtor days as ideally you would want your creditor days to be equal or higher than your debtor days.  If it is lower, you need to improve your debt collection, reduce your customer’s credit terms or negotiate better payment terms with your own suppliers to avoid cash flow problems.
7. Inventory Days or Stock Turnover – the average days the goods you purchase remain in your warehouse or on your shelves before you sell them.  The calculation is:  Inventory/Purchases x 365.  The lower the number the better for your cash flow and ultimately it allows you to grow your business.

Knowing your 7 key numbers needs to be tailored to your business and they should represent and track those things that clearly tell you at a glance if your business is performing at its optimum or those areas that need urgent attention.  If you are not measuring your 7 key numbers your potential for growth and success in your business may be weakened.

At Insight Management Accountants we provide a regular reporting package as part of your business analysis which includes your 7 key numbers to ensure the health and growth of your business.  At Insight Management Accountants we are passionate about the success of small business.  Contact us today to discuss how we can help grow your profits and the value of your business.

IMPORTANT DISCLAIMER:  This article does not constitute advice.  This article is to be used as a general guide for our clients for their own private information.  Clients should not act in isolation or solely on the basis of the material contained herein. We therefore recommend that formal advice for your situation be sought before taking action in any of these areas.

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