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10 FIGURES YOU NEED TO WORK OUT

          Finance, is for many a complete mystery. Too often people keep working away in their business and never quite work out why the bank balance seems to permanently hover at the overdraft limit. Here are ten financial figures you need to work out for your business.

1. OVERHEADS – These are the fixed costs of operating your business. You are stuck with them even when you sell nothing. Wise people keep fixed costs low.
2. VARIABLE COSTS – are incurred only when you produce something, for example raw materials. These costs are good, because they are directly proportional to your sales.
3. PROFIT – As a rule of thumb, profit is the value of your sale, less the associated variable costs, less a proportion of your overhead costs. Many business forget to include fixed costs and thus lose money.
4. DEBTOR DAYS – the average length of time customers make you wait for your money. As your business grows, it becomes vital to keep this figure low.
5. FACTORING – a clever way of getting paid straight away. The factor gives you the cash when you raise an invoice then collects the debt from your customer. You can sometimes get 80% up front. The bad news is that factors usually expect you to guarantee the debt and charge a fee and interest.
6. CREDITOR DAYS – the average length of time you string your suppliers along before paying your bills. Smart operators always pay the most important, dependant suppliers first.
7. CREDIT RATING – If you habitually pay your bills late and have perhaps had the odd Court judgement made against your business, then your credit rating will be poor and people may ask for cash up front. Specialist agencies provide credit rating reports for a fee.
8. QUICK RATIO – is the easiest accounting ratio to watch and also the most important. It is the total of your debtors and cash in the bank, divided by your creditors. So, if your debtors owe you £10,000 and your bank account stands at -£2000, and you owe creditors £4,000, your quick ratio is (£10,000-£2,000)/£4000=2 Above 1 and you are solvent, below 1 and you are not!
9. CASH FLOW – Use a spreadsheet to calculate why you need your income to be phased to meet your predicted outgoings.
10. BALANCE SHEET AND PROFIT & LOSS – these are reports your accounting software will produce. Always look at the year to date figure as well as the last month’s performance. You cannot judge success on the strength of one month alone.

Reproduced from ‘The Entrepreneur’s book of Checklists’. Buy your copy here