At a glance

• Keeping track of key financial metrics such as sales, costs, profit and cash flow, and analysing them regularly, can help you ensure your business is in good health.
• This data can help you understand where you may need to make changes to improve profit margin or cash flow. Plus, if problems do arise, you can act quickly.
• For business owners less comfortable with numbers, there are plenty of tools that can help gather and visualise this information. Or consider outsourcing to a third-party finance director until the company is in a position to recruit someone.

When starting a business, you may hear about the importance of ‘telling your story in numbers’. This means understanding what drives your business by looking at its financial figures, and communicating this effectively. This understanding is not just important to explain your financial position to lenders, investors or other stakeholders. It’s critical for running the business successfully long term.

If you regularly gather figures about sales, costs, profit and cash flow, and are able to analyse them, it will give you insights such as:

•    Which of your goods and services are profitable
•    How much those things cost to produce
•    Whether they are low or high margin
•    What levers you can adjust to boost growth, efficiency and cash flow for income and reinvestment
•    Where you, as the owner, can generate most value and which tasks to delegate or outsource.

Sound analysis of these figures should also enable you to prevent or quickly head off any financial problems. For example, if your forecasted profit margin is too low, should you cut costs, increase prices or look for ways to increase productivity?

Richard Murray, Chief Commercial Officer at consultant Elephants Child, says: “In a small business, time is precious. Your focus is naturally on sales and winning customers. No one can blame a small-business owner for thinking those things are more important than analysing their financials. That’s why many develop a habit of not collecting these figures.”

But it’s crucial to get into the habit of gathering this data as early as possible. It will help you control your finances in a way that sets the tone for good management and intelligent business decisions, driving growth and profits and avoiding preventable financial difficulties.

The key financial metrics for start-ups

So which figures do you need for your ‘story in numbers’? Start by recording cash flows, the money that arrives in your bank account each month, which is the lifeblood of your business. Then, use projected sales and cost figures to forecast profit and cash flows over the next quarters, so you have a good idea where the business is heading.

If your cash-flow projections are negative, that means you need to do something now – such as make more sales or cut costs – to keep afloat. If there is surplus cash, it will show how much extra income you could plan to take or reinvest for growth.

You’ll need to know your total sales. Then calculate profit as a financial figure; as a percentage of sales, known as your margin; and pre- and post-tax.

Some companies also look at gross profit (sales minus costs of goods sold) and net (minus all costs, including fixed).

Ensure your profits and cash flows align each month as this shows customers are paying you promptly. A misalignment could indicate a problem with payment receivables, which could starve you of cash even if sales are going well.

Richard says: “Without profit, you have no cash flow. Margin is crucial because it dictates how much profit you make per sale and how efficient your business is. For example, it’s easy when starting up to think only about getting new clients and sales over the line. But that can lead to actions that will dent your margin, such as heavy price discounting.”

Converting leads into sales

One metric that sometimes doesn’t get the attention it deserves is conversion rates – the ratio of sales prospects to completions. For example, if your products and services have markedly different conversion rates, it could help you see where to focus your activity to boost sales. For example, is it due to not finding the right leads, insufficient demand or another issue with the sales process?

Knowing your operating costs

As you can see, you will need a good understanding of your costs – as a total figure and broken down into fixed costs, such as rent and machinery; and variable costs, such as electricity and shipping. Cost of goods sold (COGS) are those costs directly involved in getting your goods to sale, such as materials and labour. Monitoring COGS will allow you to spot if something suddenly changes – for example, if the price of a key ingredient in your product spikes, which could wipe out your margin – and allow you to act swiftly.

Disciplined businesses also keep separate columns on every cost item or category in their business – such as electricity, travel and stationery supplies – so they can quickly see if they are spending too much in one area.

Once you have a good handle on these figures, you can turn that into a budgeting process to help you maintain firm financial control. Budgeting involves setting annual sales and profit targets, and spending budgets for each business department.

Richard says: “We advocate disciplined budgeting because it helps you understand your costs and margins for the following year, and how many sales you need to meet your profit targets. Analysed correctly, these numbers will get you asking questions about how to improve the business. For example, why is this sales number not what I expected? That’s business intelligence and it’s one of the main ways you will increase efficiency and effectiveness.”

Get help with your financials

Another reason some small businesses fail to tackle their financials is that owners are nervous or uncomfortable around numbers and numeracy. But spreadsheets can be a great help, and there are many other financial-software solutions available that can do the hard work for you.

They can also turn columns and rows into more digestible and visually interesting graphs and tables, to help you understand and communicate your numbers. These packages can also provide real-time analysis tools, to help you make quick, proactive decisions. It’s also relatively easy to outsource financial control and analysis to a third-party accountant, finance director or CFO – or recruit those roles in-house as you grow.

Richard says: “These people live numbers, so the task is easier and quicker for them and it can be well worth the fee. The value isn’t in creating those data outputs yourself but in the decisions you make on the back of them. So set aside regular time to analyse the figures. Businesses often make the mistake of gathering lots of data but not analysing it in a way that challenges their thinking.”

Finally, remember this formula for all successful businesses: good intelligence, plus good analysis, equals good decisions.

How St. James’s Place can help

SJP partners work with specialist firms who can provide you with tax and other business advice including growth consultancy, to help you keep on top of your financial position. Speak to us today.

We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

SJP Approved 25/05/2023