On the popular ABC show Shark Tank, one of the top pieces of advice consistently emphasized by the sharks is the importance of knowing your numbers. But what exactly does it mean to "know your numbers," and why is it crucial for every business, regardless of its stage? Some of the benefits of understanding your numbers includes:
Additionally, a solid grasp of your numbers facilitates effective labor management, allowing you to communicate performance standards clearly and hold your employees accountable based on measurable metrics and not just feelings, minimizing disputes.
The foundation of knowing your numbers lies in the record keeping which is often seen as boring, however, clean records are integral to running a business. Many times when starting a small business it is easy to see record keeping as "the thing I do for taxes" or "a cost of doing business" and very little attention is put towards it. In this article we will go through a three step process and get you on the path to knowing your numbers. In a future post we will go through some essential numbers you should know at all times. In this article most of the examples will be with your financial data but the same principles hold true for non-financial data!
Unsurprisingly the first step is that we need to track the data! When you are tracking your data you want to make sure that your data is accurate and reliable.
When thinking about how to track your data it is very helpful to create a process map to visualize how your data is flowing. Below is a very basic process map for tracking and storing financial data using Dext and Quickbooks Online:
A chart of accounts that reflects your business is a necessity. Additionally, think about scenarios such as tagging your revenue by type. For example, you are a plumbing and heating store with three business lines, HVAC, Plumbing, Retail storefront. In this scenario you would want to track your sales by the four revenue streams so that you can see and analyze how each department is performing separately. It may also be beneficial to break out the labour and parts components.
Once we have ensured the accuracy and reliability of our tracked data, the next crucial step is organizing that data effectively. Staring at a sea of numbers can be overwhelming and unproductive. To enhance comprehension and usability, it is often beneficial to present the data in a visual format, such as charts and graphs. However, it is vital to maintain simplicity in these visualizations; otherwise, the intended message behind the numbers may get lost.
While organizing our data is essential for compliance purposes and tax estimates, it is important to recognize that we have yet to fully leverage one of the most valuable proprietary assets within our business. Unfortunately, many small businesses tend to become stagnant at this stage.
Below is a very simple graph that organizes the revenue, cost of goods and labour expense numbers in an easy to read format that would alert you as to whether labour expense is where it should be or not:
Data mining involves analyzing your data to identify trends and cause-and-effect relationships. For instance, you may observe a dip in sales numbers during the spring season. Another example would be determining the number of items you need to sell in order to break even on costs and start generating profit. This process is iterative and demands dedicated time and attention. Once you have thoroughly mined your data and gained a deep understanding of your business numbers, you will reach the stage of truly "knowing your numbers." Armed with this knowledge, you will be able to make confident business decisions swiftly. Furthermore, you will be equipped to construct a roadmap that will guide you towards achieving your goals.
Mining your data will often be most useful when you look at trends over time. A singular data point is only so useful. However, a plot of multiple data points can be quite insightful.
On top of being accurate and reliable you want your numbers to be ready to use in a timely fashion. Software can be a great advantage. Some of the software we use at Foundation includes:
Now that you know the three step process to track your numbers, in 5 Critical Numbers - Know Your Numbers Part 2 we will go through some of the essential numbers you will want to be tracking in your business.
Here's to building your dream business!
Foundation Accounting provides integrated bookkeeping, accounting and CFO services to small business owners and individuals in British Columbia, Canada. The firm was founded to help small business owners and individuals gain financial clarity to make better decisions and minimize financial stress in their life. We are here to support small businesses each and every day.
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