The Fantastic Five : Financial Figures You Need To Know

As someone who works closely with small businesses on a daily basis, I am more than a little concerned at how little awareness many small business owners have of the financial position of their company.

Whilst corporates have armies of accountants, finance managers and number crunchers calculating every financial ratio imaginable, this luxury is not typically available in smaller businesses, and many suffer as a result.

With clients to win, social media accounts to manage and of course, bills to pay, it is not uncommon for the ‘finance’ function of a small business to simply be a rushed inputting of figures to a spreadsheet, an email to the accountant, and no further thought given until the time comes to sign off the accounts.

There can, however, surely be nothing more important than understanding the one thing that ultimately dictates the success or failure of any business; that one thing is money.

It is absolutely imperative that as a small business owner, you are aware of the key financial figures in your business, what they mean, and how they are calculated.

The ‘Fantastic Five’ financial figures you need to know are:

Sales : sales are simply your total revenues
How to calculate : (price of product or service x quantity sold)

Gross Profit : the profit before your overheads have been factored in
How to calculate : sales – (cost of goods + direct costs)

Net Profit : the profit (before tax) after your overheads have been factored in
How to calculate : gross profit – (overheads + indirect costs)

Average Debtor Days : the average time it takes your debtors to pay you
How to calculate : (trade debtors / sales) x 365

Average Creditor Days : the average time it takes you to pay your creditors
How to calculate : (trade creditors / cost of sales) x 365

Having a working understanding of these figures is what will allow you to evaluate your business performance using the facts, will allow you to forecast effectively, and will allow you to see, at a glance, which areas of your business need some attention.

Awareness, and understanding of the financial position of your business are absolutely imperative if you want your business to succeed.

This is a guest blog by David Arthur. David has been involved in the small business sector since early 2010, and alongside his role as a Business Banking Manager for a FTSE100 institution, is the founder of small business blog AllAboutSME.