Basic Formulas for Business Success
So you have a business, you want to be more in control of your finances but are not sure where to start? Here are some essential formulas to work out how well your business is really doing and to keep ahead of the game
Don’t be put off by me using the term formulas, no complex algebra is needed here I promise! And if you are not sure, just let me know I am happy to help.
Assets = Liabilities + Owners Equity
This basically shows you that everything your business owns (assets) is funded by liabilities eg finance / loans / credit card etc and the money you put in the business or are holding in your business. It should always add up as per the formula above, if it doesn’t chances are you have missed a transaction from your accounts or not included it in the calculation.
Money you have earnt (Sales) – direct cost of sales = gross profit
Direct cost of sales is something that is vital to you being able to produce your product or service and is directly related to that, eg wool used to make a jumper or a subscription to a piece of software specifically to complete a project.
This one is really important, some say turnover = vanity profit = sanity, not my words but you get my drift. If you turn over £1m but only make 20p profit something is not quite right.
Gross profit (as above) – business expenses = Net profit
Business expenses may be overheads, such and mobile phone bills, advertising costs, utilities, website hosting etc. Basically the costs involved in running your business.
Again this is something all business owners should know, and keep track of on a regular basis. It is so important to know where you stand and you should be working this out monthly as an absolute minimum, if not weekly.
Profit Margin %
Profit Margin % = Net Profit / Sales x 100
This is pretty self-explanatory. Want to know what percentage profit you have made? Yes, great! You should know! Take the net profit calculated above and divide by your sales and turn into a percentage by multiplying by 100
Cash Ratio = cash / current liabilities
This one is great to give you an idea of how liquid your business is, or in other words how well you can cover your upcoming bills.
Cash doesn’t actually mean £20 notes in a jar on the bookshelf, it means money at your disposal which could be in the form of funds in your current account etc. The higher the figure that you end up with the better your cash flow is.
Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities / Total Equity
Sounds scary huh? Don’t panic it’s really not! Take your total liabilities (money owed to others eg banks, suppliers etc) and divide by equity (how much money you invested in your company). If the number is high, it means your company is quite reliant on debt. If this ratio is high you may find it harder to secure funding from banks etc if you need it. Some industries and roles naturally have a higher ratio, so you need to compare this with a similar company, not sure? Please ask me.
These are just a few that I think are pretty useful, should be calculated regularly and are relatively straightforward. If you have specific figures you are looking for and the formula isn’t here, please let me know I am happy to assist further if I can. The key thing to remember is knowing how well your business is performing in real time is essential. It is very easy to see money coming and think everything is fine however unless you fully examine the figures you may be in a totally different position to where you expect.