Advice:10 important figures and how to calculate them

By , published on 18th August 2010

CalculatorIf you’re new to business, or simply new to the numbers, the words people use when describing business plans can be confusing. Here are the ten you need to know best, together with how to work them out:

  1. Overheads – the fixed costs of operating your business. It’s the annual total of all the things you need to have, even if you sell nothing. Eg premises, equipment and staff.
  2. Variable costs – incurred only when you produce something, for example raw materials, transport etc. These costs are good because you incur them when you’ve sold something.
  3. Profit – as a rule of thumb, profit is the value of your sale less the associated variable costs less a proportion of your overhead costs. The more you sell, the more thinly your overhead costs are spread and the more proftable you become;
  4. Debtor days – the average length of time customers make you wait for your money. Divide what you are owed today by your annual sales to arrive at how many days on average your customers take to pay;
  5. VAT – if your sales rise above a certain annual level you have to register for VAT. This means you have to add VAT to the sales price of most things, but you can also reclaim it on your business purchases.
  6. Creditor days – the average length of time you string your suppliers along before paying your bills. Smart operators always pay the most important dependent suppliers first.
  7. Credit rating – if you habitually pay your bills late and have perhaps had the odd court judgment made against your business, then your credit rating will be poor and people may ask for cash up front. Specialist agencies provide credit rating reports for a fee.
  8. Quick ratio – is the easiest accounting ratio to watch and also the most important. It is the total of the debt owed you plus the cash in your bank, divided by the amount you owe creditors. So, if your debtors (customers) owe you £10,000 and your bank account stands at -£2000, and you owe creditors (suppliers)  £4,000, your quick ratio is (£10,000–£2,000)/£4000 = 2. Above 1 and you are solvent, below 1 and you are not!
  9. Cash flow – use a spreadsheet to calculate why you need your income to be phased to meet your predicted outgoings. Calculate the effect of people paying you late – it’s alarming!
  10. Balance sheet and profit & loss – these are reports that your accounting software will produce. Always look at the year-to-date figure as well as the last month’s performance. You can rarely judge success on the strength of one month alone.

Figures people

The good news is that you do not have to do all the work yourself. Accounting software takes much of the hard work out of bookkeeping and there are people who specialise in keeping books for others. Five reasons for using a good bookkeeper are:

  • someone else is checking your figures;
  • invoicing is not delayed because you are too busy;
  • they save you time and hassle;
  • accountant’s bills are lower if a bookkeeper has done the basics;
  • you have someone else who can chase overdue payments.

< See all advice

Robert Ashton

About Robert Ashton

Robert Ashton is an entrepreneur, campaigner and business author with three business books in the top 10 recommended for business on Amazon. He knows how enterprise can liberate, empower and strengthen people and communities. Robert is always focused on the end goal but treads lightly as he goes – that’s why he’s called the barefoot entrepreneur.

Post a new comment