The Power of Financial Metrics: Key to Making Informed Business Decisions
As a business owner, the importance of understanding your financial metrics for business success cannot be overstated. According to a survey of over 250 businesses by Censuswide and Geckoboard, companies that track their financial metrics are twice as likely to achieve their business goals.
The 6 key reasons you need to know your numbers
Knowing your numbers is vital for business success. Here are 6 reasons why:
- Your numbers tell the story of your business: By analysing your accounts you can gain a comprehensive understanding of your business’s performance and identify areas of improvement.
- You can spot early warning signs of potential issues: Your accounts can reveal patterns or trends that may indicate a problem, allowing you to take action before it becomes a crisis.
- Your numbers highlight areas of strength and weakness: Knowing where your business excels and where it struggles can help you focus your efforts and resources to maximise success.
- Your numbers provide reliable financial information for decision-making: By using accurate and up-to-date financial data, you can make informed decisions about pricing, investments, and other key aspects of your business.
- Your profit and loss account and balance sheet drive the value of your business: Investors and potential buyers look at these reports to assess the financial health and potential of your business.
- Knowledge is power: The more you understand your numbers, the better equipped you are to make smart decisions and grow your business.
To get started, make sure you produce the appropriate reports, including the Trading Account, Profit and Loss Account, Balance Sheet, and Director’s Current Account. By understanding each of these reports, you can make more informed decisions for your business.
Understanding your Trading Account: The Key to tracking sales and Profitability
Tracking sales and profitability is key to business success. The Trading Account helps you do this by showing your sales, cost of sales, and gross profit. It can be very useful to track gross profit by client. Project or division to better understand how each contributes to the business line. Small adjustments to the items in your trading account can have a significant impact on your overall results.
The Profit and loss account: Separating Profit from Cashflow
The Profit and Loss Account shows all your earnings and costs over the year and tracks the overall performance of your business. Remember that profit is not the same as cash, so you must ensure you have sufficient profit to cover cash costs. Your profit and loss account also provides a framework to benchmark your results and drive the value of your business.
The Balance Sheet: A snapshot of your Business’s financial health
The Balance Sheet provides a snapshot of your business’s financial health at a specific point in time. It measures the net worth of your business and shows if your business is solvent.
Managing Your Directors Loan Account
The Director Loan Account records all funds introduced to, or taken out of, the business by its directors. It helps you monitor your personal expenditure from the business and for the business. If the account is overdrawn, it means the director has taken out more than they’ve put in and now owes the company money. It’s important to get advice from your accountant as soon as possible to discuss the best options for you and your business.
Best Practices for Adopting a numbers-driven Approach to business
In addition to understanding the different reports, it’s also important to protect your assets and adopt best practices. This means having a clear understanding of your risks, setting up appropriate insurance policies, and regularly reviewing your financial statements.
Next Steps: How to take action and improve your understanding of your numbers
In conclusion, understanding your financial metrics is key to business success and we’re here to help every step of the way. Our services include Business plans, creating live cashflow forecasts, coaching sessions, management reports and Xero health checks.
With our help, you can ensure that your numbers are accurate and up-to-date, so you can make informed decisions for the growth and success of your business.