Is Your Business Actually Making Money? 7 Numbers Every Business Owner Should Know

Your sales are up. Your diary is full. There’s money coming into the bank.

Business must be going well… right?

Not necessarily.

One of the most common traps for business owners is judging the health of their business by turnover or the balance in the bank account.

Both are important, but neither tells you whether your business is actually making money.

A business can have record sales and still struggle with profitability. It can have cash in the bank today while facing significant bills next month. And it can look busy on the surface while margins are quietly being squeezed by rising costs.

To really understand how your business is performing, there are a handful of numbers you should know.

Here are seven we believe every business owner should be keeping an eye on.

1. Turnover

Let’s start with the number most business owners know.

Your turnover is the total income generated by your business before expenses are deducted.

Tracking it helps you understand whether sales are growing, falling or remaining relatively stable.

But turnover should never be viewed in isolation.

A business generating £1 million in sales isn’t necessarily healthier than one generating £500,000. What matters is how much of that income is left after the costs of generating it.

Which brings us to number two.

2. Gross profit

Gross profit shows how much money remains after deducting the direct costs associated with delivering your product or service.

Monitoring it can help you identify whether increasing costs are eating into what you make from each sale.

If turnover is rising but gross profit isn’t keeping pace, it’s worth asking why.

Have supplier costs increased?

Are you discounting more?

Has the cost of delivering your service increased?

Are your prices still appropriate?

Growing sales is great. Growing profitable sales is what really matters.

3. Your profit margin

Your profit margin gives you something turnover alone can’t: context.

It helps you understand how efficiently your business converts sales into profit.

Imagine your turnover has increased significantly over the past two years. On paper, that’s excellent news.

But if costs have increased even faster, you could actually be making less from every pound of sales.

Tracking your margins over time can reveal changes that headline revenue figures might hide.

4. Net profit

This is where you start to see what the business is actually making.

Net profit takes account of the wider costs of running the business, not just the direct costs associated with sales.

Wages, premises, utilities, professional fees, insurance, software and other overheads all have an impact.

A business can be extremely busy and still have disappointing net profit.

That’s why one of the most useful questions you can ask isn’t:

“How much did we sell?”

It’s:

“How much did we actually make?”

5. Cashflow

Profit and cash are not the same thing.

You could make a profitable sale today but not receive the money for another 30, 60 or even 90 days.

In the meantime, wages, suppliers, rent, tax and other bills still need to be paid.

Understanding your cashflow means knowing what’s expected to come into the business, what’s due to leave and when those movements are likely to happen.

A good cashflow forecast can help you spot potential pressure points before they become urgent problems.

And importantly, it can also help you identify when you have the capacity to invest.

6. Your debtors

How much money are your customers currently owing you?

And perhaps more importantly:

How long is it taking them to pay?

A healthy-looking sales figure isn’t much use if a significant proportion of that money is sitting in unpaid invoices.

Keep an eye on:

• the total amount outstanding
• invoices that are overdue
• your average payment time
• customers who regularly pay late

Good credit control isn’t simply an administrative task. It’s an important part of protecting your cashflow.

7. Your upcoming tax liabilities

Finally, don’t confuse money sitting in your business account with money that’s available to spend.

Some of it may already effectively belong to HMRC.

VAT, Corporation Tax, PAYE and personal tax liabilities can create significant cash demands depending on the structure of your business.

Knowing what’s coming and setting money aside accordingly can prevent an unpleasant surprise when a payment deadline arrives.

This is another reason why looking ahead is so important.

Do you know these numbers today?

Here’s a quick test.

Without asking your accountant or opening your accounting software, could you tell us:

Your current turnover?

Your gross profit?

Your profit margin?

Your net profit?

Your expected cash position in three months?

How much customers currently owe you?

How much you’re likely to owe in tax?

If you can’t answer all seven, you’re certainly not alone.

But it could mean you’re making important business decisions without having the complete picture.

Your accounts should help you run your business

Accounting shouldn’t simply be about producing a set of figures once a year and telling you how your business performed several months ago.

Good financial information should help you make decisions now.

Should you recruit?

Can you afford to invest?

Do your prices need to increase?

Are costs getting too high?

Can you take more money out of the business?

Could there be a cashflow problem ahead?

Those decisions become much easier when you understand the numbers behind your business.

From looking backwards to planning forwards

At Exchange Accountants, we believe your numbers should be useful throughout the year, not just when there’s a filing deadline approaching.

Cloud accounting and up-to-date financial information give business owners the opportunity to see what’s happening within their business much sooner and make informed decisions based on where they’re actually heading.

Because a growing business isn’t necessarily a profitable business.

And a profitable business isn’t necessarily a cash-rich business.

Understanding the difference is where better business decisions begin.

If you’d like a clearer picture of how your business is performing, speak to the Exchange Accountants team.

Let’s Grow Together.