Proving, once again, that no generalization holds for long, it is not true in all cases that business owners have to know their numbers. Sometimes they don’t.
For example, when things are going extremely well. You’ve got a good cash balance, no debt, happy customers, healthy growth, and a happy team? Then you’re okay. Focus on doing more of what you do that’s working. Pay somebody to watch the cash and know the numbers. Relax.
But that’s an exceptional case. That’s not normal. As soon as you get back to normal, as a business owner, you can’t sleep well — and you haven’t earned it — until you know the core numbers by heart.
That includes:
- Gross margin: sales less cost of sales. And not just for the whole business, but for each of the main lines of sales. Cost of sales means direct cost. The bookstore needs to know what it pays to buy the books. Anybody making products needs to know what each unit costs.
- Burn rate: what’s your normal spending level. Add up your whole spending including all the payroll, overhead, purchases, all of it. How much money do you spend each month? That’s your burn rate. You know it instantly.
- Cash balance. Obviously. I put it here because it belongs, but unless you’re one of those rare cash-only businesses, you have to also know what you’re owed (receivables) and what you owe (payables) in the near future. Because the cash balance is going to change.
- What’s on the horizon. If you’re going to need to change locations, invest in a new product line, develop a new product, invest in new equipment, you have to know that.
The best peace of mind, frankly, is a huge cash balance, and all those factors that I ticked off in the second paragraph above. But even then, shouldn’t you be reinvesting some of that in more marketing or better product? The second best peace of mind is knowing that sales are covering the burn rate and increasing, and you are owed more than you owe, and you’re covering your future with smart spending. And growing your business.
photo credit: Andrew Michaels via photopin cc
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
