There’s a lot to learn when it comes to running your own business. One of the most important things you’ll need to know is the numbers. In order to gauge how well your business is doing, it’s important that you have a good understanding of what makes a business successful, especially the finer points of business accounting. From analyzing your expenses and profits to determining which accounts are performing the best, knowing the numbers is a key component to being a successful entrepreneur. You’ll be able to pay your taxes accurately and on time, and use your understanding of financial reports to make informed decisions about your business. Here are some helpful hints for understanding your numbers and how these impact your business.

Understanding your numbers and your business

The numbers, more specifically, your financials, are what help determine how successful your business is and what needs to be changed to improve its performance.

Without a clear understanding of this, you risk losing money, and nobody wants that. Afterall, I imagine you got into this game to make a profit while offering quality products and services. To understand your numbers, you’ll need to do some digging, but just remember: Numbers don’t lie. Be ready to look at things dispassionately, unflinchingly, so that you remain honest with yourself about how things are going and where you can make changes. To get a better grasp of your financial position, use these tips for getting a handle on what’s really going on in your business:

1. Look at the expenses and payments from different accounts. The first thing you should do is make sure all of your accounts are balanced and that everything has been paid for before making any decisions about cutting back on spending. Determine what expenses are truly adding to your business and which ones are dead weight. If there are redundancies or expenditures that aren’t leading to measurable growth or at the very least, increased efficiency in workflow, faze them out to free up cash for more beneficial endeavors.

2. Estimate how much profit you will make each month. This number can help you determine if you’re making enough money or if there’s room for improvement. Keep in mind that this number will change as time goes on, so don’t base any major decisions off of it too soon. It’s important to know your priorities and your personal schedule for success. Some businesses plan ahead for several months of losses or a break-even period, where the focus is more on building infrastructure and establishing market influence. If executed skillfully and other seen and unforeseen things fall into place, this should begin to shift toward profitability within a certain period.

Other businesses expect to turn a profit from the first quarter. Certain brands and markets deal in products and services that are more tangible, more easily managed and offer an earlier look at profitability.. It’s key that you know your market inside and out, that you understand where your business fits and how to determine what a realistic expectation of profitability is for your specific field and business type.  

Why is ROI important?

In a business, it’s not enough to simply make money. You need to have a way of measuring the return on investment (ROI) for all of your time and effort. In order to do this, you’ll need access to information about how well your company is performing. This includes things like your monthly sales, net profit margin and monthly expenses, including payroll. By analyzing these numbers, you can get an idea of how much value you’re providing for your customers. 

You can also use ROI to focus on improving certain aspects of your business. For example, if you know that the average net profit margin for your company is 3 percent, you could use that knowledge to focus on lowering costs or offering a selection of higher-tier, higher priced products in order to increase the average profit margin, as long as any cost-cutting methods don’t damage your service or negatively impact your brand in the market. This will help improve the overall performance of the business and make it easier for you to reach expected goals. 

ROI helps you see the often-hidden mechanisms that lead toward profitability or losses. Beyond all the excitement of a few good months, or the worry of a few bad ones, a detailed look at ROI and all the factors that led you to those figures, allows you to get a wider, more macro view of things, so that business decisions are made with long-term growth in mind, not just immediate gains. 

Business Accounting: Making sense of reports

The first step to getting what you need from your numbers is knowing what reports to look for. There are many different reports that will give you an idea of how your business is coming along, from a financial perspective, and it can be overwhelming to pick which reports you should focus on and why.

To simplify this process, here are some integral reports to consider when trying to make sense of your numbers. 

– Financial Reports: There are four main types of financial reports that you’ll want to use for analyzing your business’s performance. They are accounts receivable (AR), fixed assets, inventory, and payroll.

– Profit & Loss Statements: Profit & Loss statements have three sections: income statement, balance sheet and cash flow statement.

– Expense Report: This report will list all the expenses incurred by your company in a given time period. It includes all necessary information like expenses paid out and expense categories broken down by function or department (i.e., administrative costs).

– Account Analysis report: This report provides detailed information about individual transactions (line items) that have been posted to the general ledger from other areas such as Accounts Payable, or invoiced expenditures, Payroll and Accounts Receivable (sales invoices and income received). An account analysis can help identify trends and give an indication of how a specific account is performing.

Tracking cash flow, income, and expenses

You’ll need to make sure you have a good grasp on how much money comes into your business and how much goes out. Tracking cash flow allows you to know whether your expenses are exceeding income. 

You can then use these numbers to determine what accounts are performing well and which ones aren’t. For example, let’s say that you have a website that costs $25 a month to maintain. If your website is bringing in $125 a month, then it is generating $100 in profit per month (minus quarterly or annual taxes, of course). Simply put, this means that the income is greater than the expenses of running the website. 

Of course, this is a simplified example. Your business is far more complex than this, involving a range of expenses, investments, financial relationships, and future goals. Keeping a focused eye on your financial reports, planning ahead, being honest with yourself, and communicating your goals are a few of the ways you can use your numbers to add to your success. 

Using the numbers to make strategic decisions

As we hinted at before, knowing your numbers isn’t simply about understanding what your business is doing now, but what it might be capable of in the future. All of us want growth. We want to expand and innovate, to better meet the needs of our market and increase profitability in the process. But to do so, we need the right information. 

You will never be able to plan ahead effectively or create confidently if you aren’t already managing your business finances closely. Great ideas will get lost beneath peripheral expenses and daily worries. Expansion will give way to debt. That’s why having the right people and programs in place to help you understand the numbers and what they mean for your business is key to building the future you envision.

Creators and CEOs that are constantly innovating and dominating their respective fields all understand the impact that numbers have on strategy. They spend a great deal of time studying to know where they can cut back, where they can bulk up, where they can shuffle money to better meet their goals, and ultimately, how to lead responsibly with both people and their numbers in mind. A successful future only happens with good grasp on the present.

Using the numbers to Identify trends

Another aspect of using the numbers to make strategic decisions is in identifying trends. In order to identify trends, you need to know what those numbers are. Financial statements don’t just present you with raw data about your profits and expenses. When viewed over time, quarterly, bi-annually, annually, then over several years, patterns emerge from the sea of figures. 

You’ll see things you didn’t know were even there, odd expenditures, under-performing resources that need updating, over-performing departments that deserve more resources to maximize on their upward trajectory, different biases toward certain aspects of the business which can imbalance the foundation of your work. Trends allow you to spot opportunities, places where outside investment or partnerships might bring a lot to the table and help you see where additional cash flow can be utilized to create something new.

The right tools to keep track of your numbers

There are several ways to track your numbers. Using the right tools can make your life easier and your business more successful. The best tools involve both human and physical resource capital. It is important that you get the best software or cloud-based programs to manage your finances well. Programs like QuickBooks Online and Xero are perfect examples of these. Both have different plan options to meet the varying needs of businesses of all sizes and types. You can also use common programs like Excel and Google Sheets to create spreadsheets and databases.

The human component is probably even more important. Whether you hire a full-time accountant or bookkeeper, or outsource to a professional for part-time work, having someone around that you can trust implicitly with understanding and tracking your numbers is one of the most important things you will ever do for your business. Don’t underestimate the power of a good financial professional to help you balance your budget and spot opportunities for future growth.

Conclusion

The only way to be successful as a business owner is by knowing your numbers completely. This helps you keep a healthy budget, remain profitable, innovate and plan for future expansion. Be sure to put the right resources and people in place to help you do this. Purchase or subscribe to quality accounting software, get a financial professional to watch over your numbers, communicate often, study and understand what your numbers mean, and act upon discrepancies quickly, before they grow into larger problems. Knowing your business means knowing your numbers. And knowing your numbers means the difference between a business that merely survives, and one that thrives.

Sound Accounts offers dedicated accounting services to businesses of all sizes. We help new and established business owners manage their finances with skill and ease, so they can make smart choices for their brand, their customers and their long-term growth.

For quick answers about knowing your numbers, check out our frequently asked questions below. 

FAQ

Why is it important to know my numbers as a business owner?

Knowing your numbers not only gives you a clear picture of how your business is performing, but helps you spot patterns within past performance and opportunities for growth. WIthout a solid handle on your finances, you will never be able to consistently succeed or measure this success in a way that allows you to build upon what you’ve established. Business owners that understand their financial reports and use them to plan ahead, are always more successful than those who ignore their numbers.  

What kinds of reports should I understand?

Though there are others, it is important you understand Financial Reports, including accounts receivable (AR), fixed assets, inventory, and payroll, Profit and Loss Statements, Expense Reports and an Account Analysis Report.

What are the most important tools for managing my numbers?

These include both programs and people. Excellent software or cloud-based programs like QuickBooks Online and Xero are perfect, feature-rich tools. Also, don’t overlook the most important thing, hiring or contracting an experienced accountant or bookkeeper to watch over and help you manage your business finances. They can help you better understand your numbers and spot opportunities while saving you money by cutting costs where redundancies or inefficiencies exist.