What are the 7 key numbers?
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Having spent many years producing and analysing Accounts we have concluded that focusing on just 7 key numbers within a business is the key to driving your business forward. By condensing the many complicated numbers behind a business into seven simple, key numbers and then focusing on the 7 key growth drivers you can make business simple for yourself to understand your business your accounts and your numbers and how you can then make them better.
These numbers are not all in a set of accounts.
So what are the 7 key numbers? Here we explain what they are and why from experience we have chosen them. Let’s dive in:
1. Revenue Growth
The first number is revenue growth. Now, this is as it sounds, we’re looking at the revenue this year compared to the previous year to look for the growth that YOU want. And most businesses do want to grow, so your tracking here to make sure that the business is going in the right direction. Revenue is a really good indicator of a growing business. It’s not the be all and end all as you’ll find out, but it’s a good indicator.
2. Gross Profit
The next number is the gross profit percentage. What you are looking at here is making sure that your business is returning a good amount of profit from its main activities. Those costs that it incurs to make sales and also deliver the services or goods that they provide.
3. EBITDA
The third number is EBITDA percentage. EBITDA can seem like a bit of a mystifying concept to many but in reality you simply need an understanding of how it is calculated and what it means. So, to simplify it EBITDA stands for earnings before interest, tax, depreciation, and amortisation. We strip out those costs and then look at the earnings, or the adjusted profit in line with revenue, and again make sure that your percentage is in line with where your business needs to be and where you want it to be. This is looking more at overhead costs rather than cost of sales, which is covered in gross profit percentage.
4. Revenue per Employee
Revenue (or sales) per employee is a great number, because it doesn’t just look at one fraction of the business, it looks at lots of different things. So, it’s looking at revenue obviously, it’s looking at employee costs. Then it’s also looking at employee capacity and productivity, and are they using the systems correctly? Do they have enough training? Are they using the right tools? It’s one number that looks at many different areas of the business, and it’s not just in isolation. So, it’s a really joined up approach to running the business from that one number, and it looks at culture as well across the whole board.
5. Core Cash Target
The fifth number is core cash target. This looks at the amount of cash that ideally the business will keep on hand before startIng new projects or paying shareholders more dividends etc. It looks at the total taxes due and adds an element of overheads as a buffer. So it’s an amount, or core cash target that the business should have in reserve ideally. And any cash over and above that is surplus and can be used in the future for new projects, for additional payments to the business owners, or for recruiting new team members.
6. Cash Days
Cash days is the sixth number, this is also known as working capital days. We’re looking at four different numbers here:
Accounts receivable days – how long it takes for your customers to pay.
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Accounts payable days – how long it takes for you to pay your suppliers.
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Inventory days – how long it takes for your inventory, your stock to be turned into cash.
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Work in progress days – how quickly your work in progress is turned into cash.
So, it’s those four numbers put into one, called cash days. And that gives you a snapshot of how long it takes for the money to go through your business. And again, it’s an indicator of those four different areas. So, it’s a bit like revenue per employee, it looks like at a multitude of different areas within your business to make sure that you’re doing the right things in different areas, and you can tweak at least four different areas there to make those numbers improve for your business.
7. Business Return
And the final number is business return. What we’re doing here is looking at what your business is worth to you based on its current profit basically. And I suppose another way of looking at it is, is the business producing a good enough return, or should you just stick your money that you invested into your business into the bank? That’s another way of looking at it to make sure that your hard work and effort you put into your business, and running your business, is actually producing the type of return that you want it to produce.
From our experience, these seven key numbers are essential for any business to monitor.
They’re generic enough to go across pretty much all businesses, but specific enough that when you start to drill into the numbers, you can see how they can impact your individual business.
These seven key numbers cover all of the financial aspects of business by effectively linking the profit and loss report, the balance sheet and the cash flow reports into one simple summary of the key points to monitor.
Of course knowing these numbers isn’t enough.
How can you change them? How can you improve them?
Well there are 7 key growth drivers that you can use to impact your 7 key numbers.
7 Key Growth Drivers
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Creating more sales leads
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Converting more sales leads
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Increasing the average value of each transaction
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Getting Customers to spend more often with you-get them to come back more often
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Getting customers to stay longer with you as a customer- increase the lifetime value of your customers
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Pricing- how to price your services or product for maximum profit
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Systems- create systems for all the repeat stuff your business does
A common mistake for many businesses looking to grow is to focus on one growth driver. By focusing on the 7 key growth drivers and monitoring the effect of the 7 key numbers you can really drive your business forward to turn it into the business you want.
If you look at the options we offer to work with you on this you can choose the level of service that fits you best from Bizsure, Bizwatch or Bizdrive.
The Lyness Growth Academy will focus you on practical ideas that focus on the 7 key growth drivers to impact and improve your 7 key numbers.