It is important for business owners to thoroughly know and understand certain financial figures to be successful. This is especially crucial for small to mid-sized organizations where typically the owner themselves run the most day to day functions along with handling the financials.
Below are seven such fiscal numbers that are essential for all business owners.
The cash flow of a business is determined by subtracting the operating expenses (OPEX) from the revenue generated by your business. It also adjusts for the working capital (any inventory or accounts receivables) and the depreciation to the net income.
The operating cash flow gives a clear indication of the health of the business. If it is more than the outflow, then you are safe and if it is not, then you need to re-evaluate your expenses.
The net profit ( also called Net Earnings) is another indicator of the financial health of your business. It is calculated by subtracting all the expenses (including taxes paid) from your income. While it is not adjusted for depreciation like cash flow, net profit is a very important number that all business owners need to know.
Found in the periodic P&L statements of any company or business, profit and loss amounts are one of the most used financial numbers. These are calculated by subtracting the total expenses from the revenue and sales generated for a specific period. Profit and loss are usually calculated monthly and are a good indication of the future of the business.
The core aspect of any business is to make a sale of some kind and generate revenue from that. Thus, the sales numbers are some of the first details that business owners look at while determining the success or position of their company.
Sales figures are indicative of several factors. They can show whether a business is seasonal and which markets are doing better. These insights help owners to plan their future steps efficiently to attract more customers. It is often helpful to look at monthly trends to see the seasonability of these figures.
Understanding the optimum price point is necessary to rake in success. Business owners need to know at what price they can sell their products or services so that it covers all the overhead costs of production while generating profits.
This is the amount that remains once all the production and other expenses are deducted from the selling price of a product. If the gross margin is low and insufficient to cover the operating expenses, then you are selling your items at a price lower than they should be. A high gross margin is thus necessary to run a business properly.
A gradually increasing inventory indicates that sales are not good and you might end up overstocking. Conversely, if you find that inventory is fast depleting, then it means that your product is in high-demand and chances of profit-making are high.
Proper understanding of these financial numbers gives business owners a sustainable competitive advantage and helps them take their businesses to newer heights. At Foster Financial CPA, we assist our clients by sending them their P&L statements and balance sheets to ensure that they know the important figures.