Many business owners avoid analyzing their business numbers, due to the fear of what they would discover. Are you like that too?
They are mostly content with just making sales, without taking a close look at their business’ financial health. This is like ignoring a festering wound; because it will hurt to take care of.
Our co-founder once consulted with a business owner, who always feared analyzing her business numbers. However, the day she took the bull by the horns and decided to analyze it, she realized how small she had been playing.
To her, the business was a mere side hustle. However, that analysis proved her wrong to reveal how profitable the business has been.
And with this knowledge, she was able to grow the business from retail to wholesale, attract international partnerships, employ more hands to run the business; thus, creating employment opportunities for others.
But it all started from analyzing her numbers!
In this article, we would examine why knowing and analyzing your business numbers is important, and key business numbers to pay attention to. Let’s dive in.
Why you should Analyze Your Business Numbers
Business is a numbers game. When you don’t analyze your numbers, you are shooting yourself in the foot. Here are 5 reasons to analyze your business numbers:
1. Make better decisions for your business
Analyzing your business numbers reveals many things about the business to you, aiding you in making better and strategic decisions.
When you understand your business numbers, you know the things to prioritize to generate better revenue. It also helps you make better decisions, in terms of hiring, business expansion, etc.
2. Identify when something is wrong with your business
Many businesses are leaking money, without the owners’ knowledge; due to being ignorant of their business numbers.
Your business numbers reveal the state of health of your business; helping you know if you are spending more than usual on a particular expense, if your employees are stealing from you, if you are gradually moving towards bankruptcy, etc.
3. Enables you to access finance and funding
To access funding from investors and credit facilities, a clear understanding of your business numbers is required.
A lack of financial records to show how the business has been doing in the past would make it difficult to ascertain how the business would perform in the future. This then makes investors not confident enough to invest in such business.
4. Helps you know your most profitable product/service
Another benefit of analyzing your business numbers is that it gives you insight into your most profitable product/service. This then helps you make better decisions, in terms of pricing, setting of profit margins, etc.
5. Reduce unnecessary expenses
Analyzing your business numbers also opens your eyes to any unnecessary expenses you are incurring; to cut off or reduce them to the barest minimum.
For example, if you are subscribed to a paid tool for your business, but discover that it is taking so much money without bringing in much revenue, you can switch to a free option that would bring similar results.
4 Financial Numbers to Analyze for Business Growth
Profit refers to the amount of money left after deducting expenses from revenue. In analyzing profits, you should assess your pricing, to make sure you are not underpricing your products/services.
You should also assess the overall profitability of each product/service you sell, to know the products that bring in the most revenue. In addition, look for means to reduce your expenses, in order to increase profits.
Your expenses refer to the amount of money spent in the production of goods and services and paying for things like equipment, rent, marketing, salaries, etc.
In every business, there are recurring expenses and investment-based expenses. Investment-based expenses generate more money for your business over time; thus, they should be prioritized. For example, buying a tool that speeds up your work process.
In analyzing expenses, ensure that your expenses do not exceed your revenue. That is, spending more money than you are making, thus, leading to losses.
3. Cash flow
Cash flow is the bloodline of every business. It refers to the amount of money that goes in and out of your business over a period of time, which determines the liquidity of your business.
To calculate cash flow, look at the difference between the cash you have at the beginning of a certain period, typically a month, from the cash you have at the end of that period. The difference between this is what determines if your cash flow is negative or positive.
To have a positive cash flow, track your cash and reduce the amount of credit you give customers. You can also reduce the amount of cash that goes out of your business, by spending less than you earn.
Confused on how to calculate your business cash flow? Our cash flow guide is the answer you need to get a hang of your cash flow for better financial planning. Get a copy here.
Sales is the money you make from selling your product/services.
In analyzing business’ sales, observe when there is a dip and when there is an increase in sales. This helps you know what to do to prevent further dip. And for an increase in sales, it helps you know how to sustain it over time.
You should also do a periodic sales forecast, to help you plan well for the future.
Analyzing Your Business Numbers for Financial Success
Understanding your business numbers would keep you atop what is going on in your business, and help you make strategic decisions that move your business forward.
Ignore your numbers? And you are a few steps away from running down.
At Triift Africa, helping MSMEs set up a system for analyzing their business numbers is our forte. And we have worked with many small business owners, who have seen success in this regard.
Ready to take the bold step of analyzing your business numbers to accelerate your business growth? Send a mail to us at email@example.com or visit our website.
So, which of these business numbers have you analyzed in the past, and how did it affect your business? We would love to hear from you in the comments.