3 Numbers Every Business Owner Should Know

3 Numbers Every Business Owner Should Know

3 Numbers Every Business Owner Should Know

If you are serious about developing and growing your business, then there are certain measurements that you should have in place so you know where your business is heading.

If you can’t measure it, you can’t manage it!

Break Even Point

This is the minimum level of sales that you need to make, to cover all your business costs and start to get into a profitable situation. Assuming you know your fixed costs (e.g. salaries, rents, rates – often referred to as overheads) and variable costs (these relate to the cost of production and vary with quantity e.g. raw materials) within the business, the simplest way to work this is as follows:

Work out your gross profit (GP) = Total sales – Variable Costs

Calculate your GP percentage = Gross Profit ÷ Sales

Break Even Point = Fixed Costs ÷ GP Percentage

For example, if your sales turnover is £500k, your fixed costs are £100k and your variable costs are £200k – your break even point will be £167k; meaning that once you have achieved £167k of sales revenue, you are in a profitable situation – below this number you are making a loss.

(Use the free break even point calculator to calculate your break even point)

Cashflow

Cash is the biggest killer of businesses – large and small. Knowing what money is coming in and when and what money is going out and when is vital. Unfortunately most accountants only provide historic information on your finances; often at least a few weeks if not months after the end of your accounting period. This doesn’t allow you to do much about a cashflow situation.

You should be able to forecast what cash is coming in through the orders that you currently have and hopefully can forecast. Be realistic about when the invoices will be paid and look at the worse case scenario rather than the best so you are not left with any shortfalls or surprises if money doesn’t come in on time. Likewise you can look at your outgoings, your fixed and variable costs for the business. Particularly take note of tax bills such as VAT or NI contributions as these are often a big chunk out of any business’s cashflow when these fall due.

(Forecast your cashflow using a free cashflow template)

Conversion Rate

In order to survive in business, you need new customers doing business with you. Only you know how many customers you want over the next 12 months – for some it will be 1000s, for others maybe only 10s. Either way, you need to be aware of your sales pipeline or funnel. This allows you to track a potential customer from the prospect stage right through to the point at which an order is placed or a buying transaction occurs.

Now whilst there may be a number of stages in the sales process for your business, for simplicity lets just look at prospect through to initial engagement, followed by proposal and finally order placement.

Working this backwards, the first important measure to know is your conversion rate. Of the potential clients that you get to make an offer to or engage with in a sales conversation, how many of those lead to business? For the sake of argument lets say you close 1 in 5.

Now, of the prospects that you initially engage, how many of those carry on to the next stage and are willing to accept a sales proposal. So, for example, if you are conducting a telemarketing campaign to your target market, where the aim is to get an appointment – what is your success rate here? Again, for this exercise, let’s say 1 in 10.

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