I’ve never been one for following the rules. The whole idea of a ‘financial year’ as opposed to a ‘calendar year’ for instance has always seemed really dumb to me.
In my head the year starts in January, so why does the financial year start in July in Australia, March in the UK and April in New Zealand??? And yes I’ve lived in all those countries which makes it three times as mind boggling!
I tried hard to conform. I’ve listened to accountants and so called experts. I asked for benchmarks. I asked them to prepare reports for me. But I was never happy with the information I got back. The financials and the way it was being done just didn’t make sense to me. So I took matters into my own hands!
Sure I still use an accountant (I’ve actually found a really good one now – so good, I won’t even share him with anyone!) and he adds lots of value, but what has been revolutionary for me was just taking a step back and thinking about what was best for me.
I thought to myself ‘You work a calendar year. You plan for the year ahead towards the end of a year. So why don’t you forget the whole financial year and just go ahead and plan and work to calendar years?’
I also thought to myself ‘just work out what you want to know about your financials, and learn how to find it out yourself’.’
And you know what? It worked!
I started with what I thought I wanted to know, and over time I’ve worked out lots more sets of data I feel I need to crunch each and every year (and in other frequencies too) in order to come up with the information I need to know how my business is operating in. Like everything I do, it’s not conventional, but hey, if it works for me, it just might work for you.
Here are the seven figures we always make sure we pull out of my accounts system (Xero) each and every year around this time, in order to put together a solid plan for the calendar year ahead.
1. What is your gross profit margin?
Ask yourself ‘what revenue did I make in the past 12 months?’ (I also break this down into quarters and months)?
‘What were my cost of sales in the in the past 12 months?’
Therefore ‘what was my gross profit margin in the past 12 months?’
Note – Gross Profit or GP = revenue – cost of sales.
FYI: My accountant encourages me to operate at a 60% gross profit margin or better. Some industries will vary on this depending on what you do. We have quite a lot of costs of sales as we pay many contractors in this line, being a service based industry and a more contractor model.
2. What is your net profit margin?
What were my expenses in the past 12 months (I also break this down into quarters and months)?
Therefore what was my net profit margin in the past 12 months. Note – Net Profit or NP = revenue – cost of sales – expenses = net profit.
In short your net profit is very important because it is how much money you are actually making! If you don’t take a wage from your business, the net profit may be your wage for the year so you want to make sure it’s a good one.
In an ideal world, you’ll be drawing a healthy, regular wage from your business AND drawing a net profit, whilst leaving money in the bank for a rainy day.
N.B. It’s a good idea to leave up to three months of wages and expenses in the bank at any one time – a safety cushion should things go south and you need a little bit of a financial buffer at any point. It’s simply the responsible thing to do as a business owner.
3. What growth % do I want to try and grow by in the year ahead?
It would be easy to say you’d like to grow 100% or even 1000% in the year ahead. This may actually be achievable if you are a fledgling business who is going from zero to hero.
But as you get a few years into the piece like us (celebrating our 7th year in business!), you may have to be a bit more conservative about your growth rates. In 2014, our company shot for a 20-30% revenue increase which is ambitious for a company as old as we are.
But we’re proud to say with six weeks left in 2014, we’ve achieved our lower side target of 20%. Hopefully in the last month of business we’ll be able to push that up to closer to 25%, smack bang in the middle of where we wanted to be.
N.B. There is a hell of a lot of hard work in achieving figures like this. They don’t just ‘happen’. So if you’re not prepared to work for it, don’t go setting yourself targets like these. You’ll also need to review them regularly to make sure you are on track and can pivot if needed.
4. What is my breakeven?
VERY important figure this one. You can have all the targets you like in the world but if you’re not making ends meet, you might as well go home and stay home!
Your break even is essentially your costs of sales + your expenses = your break even and it’s worth reviewing this at least every year. If you’re going through a massive growth phase, you may even like to check it more frequently to make sure expenses aren’t spiralling out of control.
A breakeven if basically ‘what is the absolute MINIMUM you have to make before you are actually LOSING money?”
Go through each line item in your expenses each year (or more often) and then work out what your fixed costs and variable costs are (just give them your best guesstime) which will tell you what you have to pull in the year ahead to just break even.
Know this figure and monitor it carefully!
5. Where has my revenue been coming from to date? Where do I want my revenue to come from in the year ahead?
If you’ve set up your online accounts system correctly, you should be able to do an export breaking down each of your revenue streams. These might be revenue by service or by products. Once you have a figure of revenue for each of these products or services, divide it by your entire turnover for the year to date and time it by 100 and you have the percentage revenue it represents.
Once you have these consider if you are getting more revenue from one product than you thought? Less from one you thought was doing better than it actually is?
Then consider what you want to do in the year ahead. Apply percentages – perhaps you want some services or product lines to stay as they are, as they’re your stable ‘cash cows’ who will keep producing revenue year on year but won’t necessary grow. You also have what are refered to as rising stars – the ones you think are growing and that you want to grow. Still others might be ones you ‘dog’ because they’re not performing and you need to stop them in their tracks.
You can also consider what new products/services you may to create/innovate in the year ahead. For instance in 2015 we’ll be rolling out a range of new ‘in a day’ products which are more systemised, scalable and which we believe will improve cash flow (the lifeblood of every business).
6. Who are my best customers? Who spent the most with me in the past calendar year? Who has the potential to spend a lot in the year ahead? Who do we like working with? Who are we getting results with? How do we do more of this?
A business is no good if it doesn’t have good relationships with their customer base and appreciate them from time to time. Apart from analysing where our revenue is coming from on a product or service basis we actually take this one a step further and work out who our top customers are by revenue.
This year we’ve identified approximately 20 customers who are our top customers, who will therefore command extra thought and attention when it comes to christmas gifts/thank you gifts.
7. How much money am I paying staff and contractors and other suppliers?
It’s also a good idea to go through and work out who you are paying what money to during the course of a year. Could you negotiate a better rate if you are putting some serious volume through? Are you anticipating any pay rise requests? Are you better to switch any relationships from staff to contractor or contractor to staff? Export a report of your debtors and take a look at this. Look for any inefficiency you may be able to find.
Communicate the plan!
The final piece of the equation is not so much a figure to export and analyse but another important question to ask yourself, and another thing to implement.
Whilst you might have got in right under the hood and totally got a handle on the state of affairs in your business, unless you communicate the ‘where we are and where we are going’ piece effectively, you could well have shipmates sailing in another direction.
We’ve found a simple document with a 2 page executive summary, a 1 page financial breakdown of actual to projected and then a 1-2 page ‘mini business plan’ per product to be a good format for us.
We’re so nice we’ve even turned it into a template so you can use it in your business.
We also have a Google Spreadsheet for all our figures that we use and collaborate on throughout the year. It helps keep things focussed.
We meet weekly to discuss day to day and week to week tasks, monthly to check our figures, quarterly strategic planning days with 1 big tamale strategic planning day per year, which we aim to have this document ready for.
What is your businesses current approach to financial reporting? Are you like clockwork or is it something you could improve on? What sorts of figures are meaningful to your business? Do you think you’re asking yourself the right kinds of questions about your business to extract meaningful and useful information? We’d love to hear from you in the comments section below. And if you’ve found this article helpful, please feel free to share!