Knowing your numbers means you truly control your business, says Standard Bank

Taking a personal passion and building it into a business may be satisfying, but satisfaction can soon turn to disappointment if you don’t know much about the numbers that make your venture tick.

It’s on the question of numbers that most entrepreneurs lose sight of exactly why they are in business. It may be great to spend your days doing what you love and leaving the bookkeeping to someone else, but the reality is that business is about making a profit. Personally losing track of the rands and cents coming into and going out of your business can be the quickest road to disaster, warns Standard Bank.

“It is one thing to hand over responsibility for drawing up balance sheets to an accountant or bookkeeper, but what is important is that, as a business owner, you realise that accountants are doing nothing more than recording historical financial information that tells you where your business is today,” says Clive Pintusewitz, Head of Small Enterprises at Standard Bank.

“It is only you who can make decisions about your business. To do this you have to be able to understand and interpret the numbers that tell you how healthy your business is and whether it can grow.”

Mr Pintusewitz says that there are two vital things every business owner needs to know about their numbers. These are:

• Understanding your income statement

A basic formula for calculating a simple income statement says that total sales (turnover) minus the cost of sales gives you your gross profit. Subtracting your overhead expenses gives you your net profit.

In simple terms, the main elements in this formula are:

- Total sales, or turnover, which is the amount you invoice customers or the sales you make every month.
- Cost of sales is what it costs to put your products on the shelf. This includes materials to produce the product, delivery, import duties, and other costs.
- Gross profit is the money left over after you deduct your cost of sales from your total sales or turnover, but does not include overhead expenses.
- Overhead expenses are your monthly costs that have to be deducted from the gross profit. These costs include items like rent, salaries, as well as items that can change every month like telephone charges, petrol and travel costs, and electricity.
- Net profit is what remains after all expenses have been paid, and on which tax must still be paid.

• Knowing what your business’ break-even point is 

Knowing your break-even point is important as it tells you when your gross profit is equal to your overhead expenses.

The break-even point tells you just how many sales you need to make before you can begin making a net profit. Once you have achieved break-even, you know that you are making a profit and that your business is operating correctly. Getting to the break-even point should be the first objective to be achieved when running a business.

Using the break-even point, you can then calculate how many sales you have to make to break-even, and what your average sales price should be.

If you find that the break-even point is higher than you expected, it is time to take remedial action. Strategies to do this can include:

- Finding more affordable suppliers so you can reduce the cost of sales.
- Reducing overheads by not hiring staff, or by managing office expenses more tightly.
- Selling your products at a higher price. Before doing this, however, you must check your prices against those of your competitors.
- Marketing more aggressively so you can sell more products.

“All this may sound complicated, but it really isn’t. Taking a few hours to do the calculations, or getting someone to help you with them, could make all the difference between enjoying what you do, or spending most of your time worrying about why your business is not performing.

“The key lesson is that knowing your numbers really does pay,” says Mr Pintusewitz.

Note to the editor:

The topic of ‘knowing your numbers’ was covered in the fourth webcast in the Business Coach Webcast Series, which has been structured to bring on-tap support to SMEs, making it easy to access practical advice on topics from starting a business to complex matters such as company law and planning for profitability.

The series runs at 17h30 on a fortnightly basis until 2 October 2013.  Access is free, and viewers are requested to register at www.standardbank.co.za/bizconnect.  Viewers will also be able to communicate with business specialists in real-time while viewing the webcasts and pose questions online or via Twitter by following @SB_Bizconnect or #businesscoach.