5 Critical Numbers for Business – Part 2

posted in: Accounting | 0
All Tradies know how important numbers are for their business success.

In fact, without the ability to measure up the job and use these numbers to get the job done right, Bob the Tradie, who was the example we’ve used in Part 1 of this article (published last month), wouldn’t have a business to work in.

Tradies who go into business for themselves do it because they love what they do, and yet, most of them would love to spend more time with their families or go fishing with their mates.

Using the 5 critical numbers to Bob’s advantage, he would be able to increase his profit AND do all of the above. He would no longer be running himself ragged going from job to job and still not getting ahead.

In Part 1 we’ve spent some time showing you the importance of numbers in measuring the success of a business, and discussed 1. Gross Profit in $ / Gross Margin % and 2. Markup.

Now let’s focus on the other three numbers.

 

  1. Net Profit $ / Net Margin %

The Net Profit figure in dollars is worked out by deducting the costs and overheads from the Gross Profit. It correlates to the Net Margin figure in percent. While Bob’s wife would be more interested in the Net Profit figure, the Net Margin is more useful to Bob when assessing the profitability of his business. Net Margin figures are used in benchmarking business success and Bob should be using this metric in his financial reports.

 

  1. Budget

This is such a useful tool for business, and yet we find in our practice that most Tradies don’t spend time creating a budget and cashflow forecast. Bob will find that a budget will help him better manage his cashflow needs, for example, when he needs to buy more materials and, of course, to put money in his bank account to cover the cost of living for his family. With a solid budget Bob could also walk into any bank and talk to them about a loan, if he needed one.

 

  1. Breakeven

What does breakeven mean for Bob? Well in simple terms, a breakeven figure identifies the number of sales to be made before all business expenses and profit begins (before tax). It is the spot where Bob’s business neither makes a profit nor a loss. This figure can be calculated and once Bob knows it, he’ll have an idea how many more jobs he needs to do, or how to run his business more profitable, before he can put more money into his bank account for his wife.

 


Please Note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances. Copyright © 2017 Robert Bauman.

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