The 5 Numbers Every Business Owner Needs to Know | Meg Wheeler | Skillshare

The 5 Numbers Every Business Owner Needs to Know

Meg Wheeler, Business Money Consultant

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6 Lessons (13m) View My Notes
    • 1. The 5 Biz Numbers You Need to Know Intro

    • 2. The 5 Biz Numbers You Need to Know Cash Flow

    • 3. The 5 Biz Numbers You Need to Know Accounts Receivable

    • 4. The 5 Biz Numbers You Need to Know Customer Acquisition Cost

    • 5. The 5 Biz Numbers You Need to Know Profit

    • 6. The 5 Biz Numbers You Need to Know Growth


About This Class

In this short class, you'll learn the 5 numbers that you need to know to run a successful business. Even if numbers aren't your thing, you'll want to get a handle on these 5 numbers to make better business decisions. 


1. The 5 Biz Numbers You Need to Know Intro: Hello, everyone. Thank you so much for joining my training today. Today we're gonna talk about the five numbers that every business owner needs to know. So for those of you who don't know me, my name is Mike Wheeler. I'm actually the co founder and CEO of an online gift company and marketplace for women called one for Women. I am also a biz money guru at meg k wheeler dot com. So I helped created an online entrepreneurs set up and manage the money in their business. I'm a former c p a and international tax consultants, and I'm really passionate about supporting women and supporting entrepreneurs. So I'm so excited to be here today to give you this training. 2. The 5 Biz Numbers You Need to Know Cash Flow: Why do you need to know your numbers in your business? I know a lot of us tend to you hide from the numbers because they seem really scary. But they're really not. And I'm here to tell you and to promise you that if you spend a little time really thinking about them and figuring out the ones that you need to focus on, you'll actually feel more confident and b'more informed in your business that you could make better decisions. So the first number that you need to know in your business is cash flow. So what do we mean by cash flow? Monthly cash flow is really just your revenues that have come in over the month and your expenses that go out. So in this example, if we have $10,000 of revenues coming in in the given month and we have $4500 of expenses going out, that our monthly cash flow is a positive $5500 on, we always want to see positive. That's really the goal here in this example, where we have revenues of $6000 every month and expenses of 7500 we have a negative $1500 cash flow 3. The 5 Biz Numbers You Need to Know Accounts Receivable: So the second number I like to look at is our accounts receivable Accounts receivable can be anything such as outstanding invoices. If you have declined payment or membership subscriptions, it can be returned checks and just really any other amount that someone owes to your business. So the number we really want to know when it comes to your accounts receivable is your a r turnover. And essentially, this really just tells us how long outstanding payments last or or go unpaid in your business. So the A R turnover is calculated by the total accounts receivable outstanding, divided by the total amount, dollar amount of sales you've had. And then you take that number and multiply it by the number of days that you're looking at this and that gives you your days sales outstanding. Okay, so let's look at an example. So if we look at this over a 90 day period and as of today, my accounts receivable outstanding, So invoices I've sent out that haven't been paid is $10,000 my total sales over that period is $25,000. Then if we put that into our equation, the 10,000 divided by the 25,000 and sales times. The 90 days gives me 36 days sales outstanding. So typically a good rule of thumb is that your days sales outstanding. Your de eso should not exceed your payment term by more than 1/3 to 1/2. Let's look at an example of that. So if our payment term ist 30 days meeting, when I send my invoice to my clients, I tell them that they have to pay within 30 days. The my idea so should not exceed 40 to 45 days, which is about 1/3 to 1/2 greater than that payment term. So let's go back to that example really fast. Where we calculated over that 90 day period are de eso was 36 days. If our payment term is 30 days, therefore our Max de eso should be 40 to 45 were good. It means we're getting paid in a reasonable amount of time. If it went over that 45 days, then we would start to be concerned and maybe need to tighten up our payment terms or our system for making sure that our clients are pains 4. The 5 Biz Numbers You Need to Know Customer Acquisition Cost: So the third biz number you need to know is your customer acquisition costs, so your customer acquisition costs, or your C A C for short, is essentially the cost it takes for you to acquire each customer. So if you're selling a $50 product that you have a $20 profit on, let's just say, But it's actually costing you $20 to get that customer than you're actually not profitable , because you're spending all of the profit on that product just to bring that customer in. So it allows you to price your products and services correctly. And it also tells you what you can spend and should spend on your advertising efforts by telling you what it cost you to get each customer. So again, we're gonna look at the formula for this. It's pretty simple. It's your total marketing expenses that you've spent over a period of time divided by the number of clients that paying clients or customers over that same period of time. So here's an example for you. If we spent $3000 in marketing expenses, let's just say over the last month, and we've had 30 customers over that same period than our cost of acquisition for each customer is $100. So in that case, that's that's pretty expensive. In that case, hopefully we're selling them, you know, a $500 or $1000 product or service. 5. The 5 Biz Numbers You Need to Know Profit: the fourth number you need to know your business is profit. This is the big one, right? This is one that hopefully everyone is thinking about, so the 1st 1 is your gross profit. Gross profit is really the profit on each product or service before you factor in your general costs of doing business. Rose profit is important because it helps you determine if you're pricing your product or service correctly. Remember, I gave that example before with your customer acquisition Hans of being $20 if you were only having a profit of $20 on your product, that would be an issue. It's the same kind of idea here. Let's use a service based example. So if you are selling ah, one hour call for, let's say, $50 but you valued the your your time at Let's just say $75 will. Right there. You're gross profit. It's actually growth loss is $25 because you're selling your service for $50 but you're valuing your time at 75 it is important to value your time because your time is a component that's directly associated with bringing in that revenue. So That's why it's important to understand your gross profit. We're gonna look at an example so the formula is again price of product or service, minus the cost to bring in those revenues. And I want to be clear fear they need to be directly associated with bringing in those revenues. So something like your office rent probably not directly associated with bringing in the revenue something like the If you are make you know if you're making them a product. The materials to make that product are directly associated with that revenue. If you're if it's a service, it would be your the cost of your time to get that revenue. And that gets you to your gross profit. So cost of revenues again, inventory costs If it's a physical product, the cost of direct labour, so your time to provide that service. Now it's not the cost of your time running the business. Overall, it's just the cost of your time to provide that service directly. Any materials that are used to create the product or to provide that service and other costs directly related to the sale, those all go into cost of revenues, so we're gonna even example. So if we do have a consulting service for $100 an hour, we valued our labor costs at $75 an hour. Let's say we give them a workbook and it costs us $5 to print. That workbook are gross. Profit is then gonna be $20 because our cost to bring in those revenues is 80 the 75 in the five and we're bringing in 100. So are girls profits $20. So the next number we look at is the gross profit percentage, and this is the prophet divided by the sales price. So I'm just gonna give you an example in that first case where we talked about that $100 consulting service and our profit was $20 we're gonna divide that $20 by $100. That's the cost of that service. At our gross profit percentage is 20%. Now, the gross profit percentage varies by industry. So I can't tell you. Oh, that's good. Or that's bad. You really just have to do your own research to figure out what is average in your industry and also get comfortable that you're hitting the gross profit percentage that you want. There are some industries where 20% is great and there are others where it's not great at all. So just something to keep in mind. The last number we're gonna look at as it comes to profit is net profit. So not profit is your total revenues for all of your products and services minus your total expenses. Now, this is very similar to cash flow. And if you are a cash basis business, most eso still entrepreneurs. Astle proprietors Most small businesses are meaning you recognize revenues when you physically get the cash and you record expenses when you physically pay them, then your net profit calculation is probably going to be the same as your cash flow calculation. If you are a cruel based taxpayer, which again most of you probably are not. But if you are, your net profit calculation may look a little bit differently than your cash flow calculation. Because you're not profit calculation will take into account some non cash items like depreciation, for example. But don't worry too much about that. If you don't know, you're probably cash basis. So your calculation for net profit is total. Revenues minus total expenses equals you got profit 6. The 5 Biz Numbers You Need to Know Growth: now, Our last business number that we want to look at is growth, and this is where profits gonna come back in supply. So don't worry. Here we want to look at our profit growth rate. So our profit growth rate is our current periods profit minus last periods profit and then that amount divided by last periods, profit. So you can look at this over any period. You can look at it on a monthly basis, quarterly annually. At a minimum, I would look at it on an annual basis. I would probably look at it also on a quarterly basis monthly. You know, depending on your business, if your business is really consistent, then monthly may be worthwhile. But if you have ups and downs like I know a lot of service based businesses or seasonal businesses, Dio then maybe looking at this on a monthly basis isn't as useful. But here's an example. So if this year's profit is $100,000 remember, we learned how to calculate that in the last, uh, the last few sides, this year's profit is $100,000. Last year's profit was $80,000 to $100,000 minus $80,000.20,000 dollars divided by last year's profit of $80,000. Gets us a 25% profit growth rate. That's really good. That's I would say that's pretty good again. Your profit growth rate. The average is gonna vary by industry, so you'll want to a little research on that. But we want this to be positive, right? Because this number tells us that our profit is growing. We're getting more profitable every period. That's what we want to see, and we also want to see that it's it's not becoming stagnant. So even if it's, you know, maybe one or 2% and you're thinking, OK, well, that's positive. I'm good. Well, that's pretty low. So if if you don't feel like your profit is actually increasing that much period over period, you may want to think about well, what's going on. Why is my business kind of hitting a wall here? So, speaking of which, if your profit growth rate is low or negative, you wanna look at four different areas and these areas we've already talked about, so you should now understand how to look at these. The first is your revenues. Are your revenues not increasing? Do you need to figure out ways either raise your prices? Bring in more clients, find alternative revenue streams that can help you increase. That's the first thing. The second is your expenses. Have your expenses increased and not only have the increase, but have they increased in line with your revenues, or have your expenses actually increased mawr than your revenues have meaning? It's more expensive to bring in each dollar of revenue. Now you need to look at that as well. The third is to look at that Custer customer acquisition class. Is it getting more expensive to acquire customers? You may be making more money, bringing in more revenues, and your expenses may not have changed that much marketing aside. But if it's costing you more money to bring in that extra revenue per customer, then you may actually be making less profit per customer than you were last year. And the last one is that cost of revenues have already touched on this a little bit. But again, how much is it costing you to bring in each dollar of revenue? And you can look at that through your customer acquisition cost, but you can also look at that by looking at all of the costs that directly affect you, bringing in that dollar of revenue So your inventory costs your raw materials costs your direct labor costs. So do are these all numbers increasing? Are they decreasing? Are they saying the same? You'll want to look at all of them. And when you look at all of them and truly understand what's happening in each of these areas, you'll start to see what's actually driving the bottom line of your business. And then you can make strategic changes to actually increase your profit not just your profit but your profit growth, because ultimately that's what matters.