Do numbers make you feel uneasy? When an investor asks you what are your numbers, do you know what to say? By knowing the numbers of your business, you can navigate the sea of business well and steer clear of some ugly business-destroying decisions. So what numbers are important to understand as an SME owner?
1. Your salary
As the first employee of your business, it is important to consider what your salary should be. You may look at your personal budget and consider what your salary will be with this in mind. If at the start of your business, it would be difficult to draw a full salary then you can draw a salary in relation to how your business is doing.
2. Total revenue
This is a number which tells you the health of your business. Your total revenue is the amount of money you made from all the sales your business did.
The formula is:
Number of products sold X price per product = total revenue for the product
You would need to do this equation for all the products and services your business offer. When you add them all up, that would be the total revenue for your business. If this number is high then your business is on a healthy trajectory. If this number is low then you need to review your products and service and think of ways to market them.
You can review your total revenue at the end of the year and see which services or products are not doing well and if you should continue to pursue them or cut them out of your business
3. Total costs
This can also be called total expenses. These are the variable and fixed costs your company has. Variable costs are the expenses which change every month whereas fixed costs are the expenses which don’t change and are the same every month. You need to consider every cost you incur when you create your product or do your service. If you have initial meetings with clients at a coffee shop then you need to consider the coffee you have as a cost to your company. Costs can tell you a lot about your business.
When you look at the price you charge for a product or service, is there a portion left over when you take the costs away from the price or not? If you have a zero or a minus after you have taken your cost value from your price then you need to review the costs for the product and try to cut them down or increase the price you charge.
You have now probably created a budget for your business. By looking at your costs, you can see if you’re overspending in certain areas or underspending. If you’re overspending, then consider how you can cut costs in the area. If you are underspending then maybe consider budgeting more in another area of your business.
Profit is the money you make after you have deducted all the expenses from your sales prices. Often people consider profit to be what is left after you have paid all your expenses, but what if you took your profit first and then paid your expenses with what remains? By doing it this way, you can develop a nest egg which can be used for unforeseen problems or help with a growth project. It may take time to change your perspective on taking your profit first, but by considering this new way you may move from living month to month to living with a feeling of a more secure future. You can learn more about profit first by reading Mike Michalowicz’s book with the same title.
5. Break-even point
This number looks at how many items or services you need to sell to cover the cost of the fixed and variable costs. You can work out your breakeven point in two ways.
A. Per item
The formula to calculate your breakeven per item is:
Breakeven point = fixed cost/ (sales price – variable cost per item)
If we say our fixed cost is R20 000 for rent, phone, etc and our price per item is R1.50 and the variable cost is 0.40c then the formula will look as follows:
20 000/ (1.50 – .40)
Breakeven point = 18181 units.
B. Per sales price
The formula to calculate the per sales price is:
Fixed cost/Gross margin ((sales price per unit – variable costs)/ sales price per unit)
Using the values from above the formula will be:
Breakeven point = 20000/ ((1.50 – .40)/1.50)
Breakeven point = R27 272
To break even you need to make R27 727 in sales.
By knowing these numbers you will be well on your way to growing a successful and profitable business.
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