The seven key numbers that drive profit and cash flow
In a typical set of financial reports i.e. Profit and Loss Statement and Balance Sheet, there are a lot of numbers. It can be a daunting task for business owners to make sense of it all. Then to know which numbers are the important ones. Of course some would argue they are all important, but that’s only true if you understand what you’re looking at and can control them.
The seven key numbers that drive profit and cash flow are:
1. Revenue Growth (shown as a percentage %)
2. Price Change (shown as a percentage %)
3. COGS (Cost of Goods Sold) %
4. Operating Expenses/Overheads (as a percentage %)
5. Days Receivable (average days it takes to collect)
6. Days Payable (average days to pay all suppliers)
7. Days Inventory (the number of days that stock sits on shelves - or Work in Progress which is the equivalent in a service business)
Of the ‘seven key numbers’, four are calculated from the Profit and Loss Statement and three from the Balance Sheet. How many business owners look closely at the Balance Sheet? It might be time, if the balance sheet doesn’t always make sense to you, to seek advice from a good financial controller. Someone who looks at business issues from a management perspective, rather than just a tax perspective!
The ‘Key Financial Numbers’ in business are what drive the results. Those mentioned previously can have a huge impact on profit and cash flow. A small change in any one, or a combination, of these can have surprising results as we have seen.
The ‘Seven Key Numbers’ mentioned above are the most critical to the financial success of just about every business. But there’s a BUT. Most are not contained in a typical set of financials, which is a frightening thought, considering how important they are and how they literally control your profit and cash flow!
But and vitally important, these are numbers you can do something about. They are within your power to control and manage … and you don't have to wait for your tax accountant to prepare your end-of-year financials.