Understand the Numbers.

Start by getting rid of the confusion:

There are 3 key elements for any organisation:

• Bookkeeping and producing the statutory accounts

  • This is a historic view of what’s happened in the past

• Raising finance (loans, equity etc)

  • A mix of historic actuals and future forecasts

• The numbers needed to manage the business in real time

  • Decision making

  • Testing viability

  • Driving growth

  • Assessing risks

  • Understanding past performance

This section focuses on the last of these but this also underpins the other two elements – they’re all interlinked.

To avoid the pain you need to know the basics:

• The cost to produce and deliver the product or service to the customer

• The cost of running the business regardless of how much business you do

• The selling price of your product or service

• The actual or forecast volume of sales

Reality Check

If you don’t know these basic things you are not ready to start a business.

If you’re in business and don’t know these then you will soon be in trouble – or you already are.

Many entrepreneurs have a blind spot – lack of clear understanding about the essential elements of finance.

This is not the same as bookkeeping or preparing accounts – these are just the established processes of ‘keeping count’ of the transactions.

Financial management (or the essentials) is about understanding cost structure, pricing and the impact of volume on profitability (or lack of it).

The starting point is to understand your Gross Profit – what you get when you subtract your cost of sales (variable cost) from your sales revenue.

When you divide your fixed costs (Overheads etc) by your Gross Profit per unit of sales you get the Break Even – the number of sales needed to just cover all your costs.

One unit of sale more than break even and you’re in profit.

This is your first test of viability for the business.

If your break even is 1000 units per week of sales and you’re research suggests that targeting certain customers at the planned selling price only results in 800 unit sales per week you have a problem.

But don’t despair – you might have the wrong selling price, your cost of sales might be reduced, you might be targeting the wrong customers etc.

You have objective data that helps you make decisions before you make expensive mistakes.

This is the platform on which we can build a comprehensive management information system that can drive growth and profitability.

Much more to come.