Understanding and leveraging vital financial figures in your business is an essential part of business ownership – yet so few have a handle on their numbers. Do you have a grip on your numbers?
With just four numbers – Revenue, Expenses, Profit or Loss, and Cash Flow – you’ll be better armed to guide your business to success. And here’s the best part, you’ll also learn exactly what actions to take for each number. So, let’s make a start.
- Recognizing and Forecasting Revenue
Revenue is very important for your business. It is the total money that comes into your business from all the products or services you sell. Even with the busyness of running your business every day, you should always make time to know your revenue because it can tell you a lot about the health of your business.
You can tell from your revenue number if your sales are going up or if they are going down. You can also tell which product or service is being bought more by your customers. At times, you might even notice that you sell more during certain times of the year. Knowing your revenue means knowing what your customers want, both of which are the secret to having a good sales plan.
- Track your Total Revenue for the Year
- Break down this yearly revenue into monthly revenues. This helps you to get a better idea of how your business performs throughout the year.
- Now, break down this monthly revenue into revenue per each product or service. This shows you which product or service brings more money into your business.
- Look at these numbers and see if there are any patterns. Maybe you find that you sell more of a certain product in December. Note down these patterns.
- Make a Plan: Now, use what you’ve noted down to make a sales plan. Maybe if you make more money from selling a certain product, you can focus on selling more of this product.
Revenue is not just the money that comes into your business. It is a story of your business’s success and its potential future. Always make time to know this story, as it could give your business the boost that it needs.
- Classifying and Curbing Expenses
Running a business is like maintaining a household – there are always bills to pay and things to buy. When it comes to your business, these costs come in the form of expenses. Expenses can be as small as the cost of paper clips or as hefty as your office rent. Furthermore, some costs, like paying your staff and keeping the lights on, simply can’t be avoided.
However, just like in a home setting, where you could opt to replace your old power-draining refrigerator with a more energy-efficient one to cut down on electricity bills, there are ways you can smartly manage your expenses in business too. Some costs are investments and should be treated as such (i.e. focused in the Return On Investment). Marketing is one of those expenses. If your marketing spend is bringing in revenue that creates profits then this is not something you should cut without understanding the return on that investment.
Action Plan: The first step here is to know what you’re spending on. Make a list of all your costs and group them into categories, such as wages, stationeries, rent, and utilities. Once you start seeing your spending pattern, look for the areas where you are spending more than required. Could you, for example, find a cheaper supplier for your office supplies? Or can you cut down on utility costs by becoming more energy-efficient?
This task of keeping tabs on your spending not only prevents money leaks but can also lead to finding more cost-effective ways to run your business. With careful examination and thoughtful decision-making, you can ensure your money is being used as efficiently as possible – just like choosing to replace light bulbs with more energy-efficient ones in your home. This smart budgeting could finally give your profits an appreciable boost!
- Evaluating and Enhancing Profit/Loss
Just like a road trip, your business’s journey is filled with smooth drives and occasional bumps. In business terms, your smooth drives are the profits, while the bumps represent losses. Revenue fills up your gas tank, while expenses are like the road tolls that you pay along your journey. Your profit or loss shows you how far you can go with the gas you have and the tolls you need to pay.
When you subtract your expenses from your revenue, you’re left with either profit, which is surplus money you made or loss, which is the shortfall you encountered in earning enough to meet your expenses. Handling your profit or loss wisely is like having a good navigation system – it helps you plan your journey better, keeps you ready for surprise turns, and allows for a more comfortable ride towards business growth.
Action Plan: Keep a regular check on your profits or losses. This is like checking the fuel gauge on your car – it lets you know your business’s running status. If you start seeing a loss, it’s time to consider some route adjustments. You could try driving slightly faster by increasing the prices a bit, or using less fuel by finding ways to cut down costs.
On the other hand, if you’re making profits, feel free to push down that accelerator. This surplus money can be reinvested into the business, perhaps to boost your sales or marketing efforts, or to diversify your products or services. Think of it like adding some extra features to improve your car’s performance and make your journey a lot more enjoyable.
Remember, understanding profit and loss is knowing your journey’s progress. It helps you see if you’re on track, making advancements, or if you need to change your navigation. Keep an eye on this road map, and you are one step closer to a successful voyage in the business world.
- Monitoring and Managing Cash Flow
Cash Flow is the pulse of your business, periodically oscillating between peaks and troughs.
The importance of cash flow can never be overemphasized. It has the unparalleled power to determine the survivability and sustainability of your business. As investors and business sages across the world assert, “Revenue is vanity, profit is sanity, but cash is king.” There is a fascinating paradox where businesses can crumble despite showing apparent profitability if their cash flow plummets into negative figures.
Have you ever faced situations where your clients deferred payments or your business had to tackle unforeseen expenditures? These scenarios can bow down even profitable businesses if not buffered by a healthy cash flow. Negative cash flow can also sabotage growth plans, pushing companies into tight corners where every penny counts. This conflict between profitability and cash crunch is a tightrope that many business owners walk on.
Monitoring your cash flow is akin to having a trusted auditor by your side, tracking where your money originates and where it is being utilized. It allows you to plan for the future, deal with unexpected developments, and seize growth opportunities as they arise. Without keeping an eagle eye on this ongoing financial saga, you might have a distorted image of your business’s financial health.
Taking control of your cash flow involves tracking all incoming and outgoing transactions meticulously. It also means making strategic decisions like maintaining a steady stream of receivables, delaying payouts wherever possible without disrupting the business harmony, and having a contingency plan for unpredicted expenses.
Action Plan: Be the cash flow manager your business needs. Start by making it a ritual to overview your cash flow on a weekly or at least monthly basis. Include both minor and major financial transactions to have a precise insight into your cash resources. Always aim to keep a reserve amount to cater to abrupt market changes and unplanned costs. Regularly scrutinizing your business’s cash flow will give you the license to invest steadfastly and foster sustainable growth.
Remember, managing cash flow isn’t just something you ‘should’ do – it’s something your business survival may well depend on.
With those four critical numbers – revenue, expenses, profit/loss, and cash flow – and the associated action plans, you’re one step closer to becoming a more informed, strategic business owner.
To summarise your action points:
- Record and analyze revenue, tracking high-performing items.
- Categorize and manage expenses, identifying savings.
- Calculate profit or loss, analyzing potential causes and solutions.
- Monitor cash flow, maintaining a safety buffer.
Remember, these are the markers pointing to your financial wellbeing and the seeds of informed decision making. They’re keys to the health and success of your venture and your journey to even greater heights as a business owner. Now, go crunch those numbers!
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