You might ask, ‘What has leadership got to do with numbers?’. In most business schools around the world, the two are totally distinct subjects. In our experience, however, knowing your numbers is part of understanding the context in which you are operating, and it is only by knowing your numbers that you can have the proper perspective in which to make important strategic decisions that will influence whether or not you can reach your goals. The best leaders therefore have to have a strong grasp on their numbers and use them to make informed decisions.
In a typical business, there is a wealth of information with operational systems, financial systems including our management accounts, CRM systems and the like – enough to deliver paralysis by analysis! So which numbers are the really important ones?
From an owner manager perspective, the key is in cash and profit. Without a strong reliable cash flow, all the real work of a business is impossible.
Therefore, some simple questions arise. Have I got cash in the bank? Do I have more cash in the bank than last year? If not, why not? Is this good enough for me? Do I know if I have enough cash to continue trading at the rate of growth I’m currently hitting? A cash flow forecast is always the starting point.
The next point is looking at the balance sheet and profit and loss. These are the numbers that really matter – the ones which determine whether you will be able to grow in the long run, your available dividends and your tax bill, not to mention your ability to deliver on your future growth plans.
So what should you be looking at?
- Growth – percentage turnover and profit growth, headcount growth, turnover per employee
- Profitability – Gross profit, net profit, net profit per employee
- Liquidity – defensive days – how long could you survive with nothing coming in through the door?
- Working Capital – debtor days, creditor days, stock days
- Solvency – what is your level of gearing – your ratio of assets to debt.
- Break Even – your safety margin
Looking at these key ratios can then give you specific insights into what you need to change to make your business more secure and profitable. This can play a key role in determining your business plan. We go into more detail in the Business Growth Programme as part of helping you create your own action plan for change, tying the operations into the finances so you can understand which numbers are the important ones for you to guarantee you have a secure future and that the finances support your strategic goals.