Numbers self employed every business owner should know
Not knowing your numbers is like trying to run a business with your eyes closed. If you don’t know which are your most profitable items, or how long it will take before you run out of cash, or how much your customers are worth, how can you make good decisions in the management and growth of your business?
If you are keeping accurate accounts, all the information you need will be recorded somewhere for you to reference. Here’s a few numbers we think every business owner should know, and how to figure them out…
Cashflow is king!! When a business runs out of cash it cannot operate, so knowing where you stand with your cash could make the difference between staying open and having to close. At the very least you should know how much cash you have available, and what expenses are coming up.
But to get a really good picture of the health of your cashflow, you should know how much cash you will have available to you and what your costs are expected to be over the coming days, weeks, months, and maybe even quarterly, depending on what your payment terms are.
If you are expecting to receive payments and pay expenses in the foreseeable future, you can input them into a simple spreadsheet. This way it will be easy to visualise how your cash flow is expected to ebb and flow moving forward. This is especially helpful if you are juggling invoices, as it will let you know if you are likely to run out of cash, well in advance.
Revenue and Profit
Your revenue is the total amount of income your business receives. This is all the money you have been paid and can be calculated for any period of time but is most commonly calculated per month, per quarter, or per year. Revenue is often confused with turnover but there are subtle differences, let your accountant worry about those. Just knowing how much money you got paid is all you really need to worry about just now. Revenue can also be confused with profit, which describes the amount of money that was left over after all the bills were paid. Profit can be calculated in different ways, and I’ll go into that more next!
Profit Margins and Costs
This is the percentage of profit made and can describe the profit per individual item sold or the overall operating profit of your company. You need to know both these numbers as they will guide your marketing budgets, possible investments, negotiable discounts, potential for growth, and a whole bunch of other decisions you have to make in the course of managing your business.
To calculate the profit margin of an individual item or service you’ll need to know how much it costs to bring that item to market. If you make it yourself you’ll need to include your time and the cost of every component used. Sometimes its easier to calculate larger numbers and then divide the totals, especially if you are working with very small costs. In this case calculate the costs as per 100, and then divide by a hundred at the end to get the per item costs.
If you purchase items for resale then you’ll already know the cost of each item. Once you know your costs, you’ll be able to figure out how much profit you are making from each item.
Use the same principle to figure out your operating profit. This number is the difference between all operating costs including gas, telephone, wages, marketing, servicing, rentals, mileage, banking costs, cleaning etc, and your total income. You can calculate it daily, weekly, monthly or yearly, depending on what is most useful for your business but knowing your monthly profit margin is probably most useful for most business types.
Know your average customers worth!
If you ever run awareness ads then this is especially important as it’ll show you if you are overpaying for your results. But, even if you don’t it’s useful to have a idea of what each customer is worth to your business.
It’s difficult to put an exact number on this, but to get a rough idea, first you need to know what the average life of your customer is. Start by taking a look through your customer orders to find how often your customers each buy from you, and how long they remain a customer for. Then take the average.
This will vary from business to business, but if you are a plumber you might only see a customer once every three years, however if you are a hairdresser you might see the average customer four times a year for two years, a dog trainer might sell two sets of classes over one year before they lose a client, and a subscription service might sell 4 cycles on average.
Whatever it is, the next step is to figure out how much profit you make from each sale and multiply it by your average number of sales per customer. This tells you how much profit, on average, you make from each customer, and how long they will last for.
Now compare that to your ad cost. If you find out that your average customer is worth £100 in profit over one year, spending £20 on a Facebook ad to find them might not seem such a high price.
This exercise will also reveal if it’s costing you more to find a customer than the overall profit they earn you. If this is the case, then it’s probably time for a review so you can figure out what’s gone wrong.
Your own hourly rate!
A controversial one this one, but I think everyone should at least know what they are working for!
Do you even know how many hours you worked last week? Many self employed people don’t have any idea, mostly because we don’t set aside set times to work. If you work 9-5 in an office it’s pretty easy to see how many hours you are doing. But what about the rest of us that do a bit of this and a bit of that throughout the whole day?
My day might start at 10am with some content writing. I’ll have a cuppa and do some housework, then there might be a blog to write before lunch. I’ll spend some time working on my book in the afternoon, and in between I might have 1-1’s, discovery calls, a workshop, networking meetings, and I’ll also be walking the dog, making dinner, answering emails, checking ad performance, responding to social media blah, blah, blah. To know how many actual hours I do, I have to start and stop a stopwatch every time I do something work related. I highly recommend doing it!
Figuring out your rate is pretty simple, once you know the number of hours you are working. Simply divide it by the amount you paid yourself, and you have your magic number.
Whatever you do with that number is up to you. It might be higher or lower than expected, maybe it doesn’t matter to you, but knowing is power!
If you need help figuring out all these numbers, then let us know and we can help you figure them all out in your next 1-1.