Guest blog from Empire Accounting

At Empire Accountants, we are forever spruiking to our clients the importance of knowing your numbers; we are here to help you with your numbers; it’s important to have a handle on your numbers; knowing your numbers will lead to success, and we go on and on and on.

The question begs though, how many clients actually understand what we mean when we say this?

As Accountants, we work with numbers day in and day out so our greatest shortfall can be that we assume a client understands more than they do (and more than they are willing to admit to us!). This article will define the most important and common numbers we look for when assessing a client’s business.

Turnover = Sales

And no it’s not the apple variety. Turnover is your Sales, your income, your revenue. Yes, there are effectively 4 names for the same thing.  We commonly use the word sales because, most people know what that means.  The ATO loves to confuse people by throwing the word turnover into the mix, but at the end of the day, your turnover is the total amount of revenue generated by a business during a set period (your sales).

This one is important as it is generally the one most easily understood by clients.  For many clients, we will do some number wizardry to work out your turnover sales target for the set period but if this is the only target your remember, that can be enough.

It is a clearly, easily identifiable, trackable number.

Gross Profit = The amount you make on the product/service you sell

This one is important in product/goods businesses.  We will deep dive into your numbers to work out how much it costs you to generate the sales to see how much money is left over.  This leftover bit is your Gross Profit. 

To compare gross profit, we generally will formulate this into a percentage calculation, commonly referred to as a Gross Profit Margin.  If we say Margin, we do mean percentage. This margin percentage allows us to compare your performance either against the past, against a budget or against other businesses.

This is important as your Gross Profit Margin percentage can sometimes be the thing that makes or breaks a business.  If your percentage is very low, you aren’t making much per product.  We will discuss ways to increase this percentage. 

The end game here is to ensure you are making as much as you possibly can on the item you are selling.

Net Profit = the amount you make after you consider all the costs of running the business

It doesn’t end with Gross Profit.  The Gross Profit only considers your sales less your costs to make those sales.  And there is WAY more expenses involved in operating a business than just that.  The net profit is the number we look at to see how much you are left with after considering ALL the expenses of your business.

As with the Gross Profit, we do the same calculation to find out a Net Profit Percentage. Again, for the same purpose, to allow us to compare your performance fairly.

The end game with analysing your Net Profit is to ensure that overall your business can generate a fair profit for all your hard work and effort and meet all the business’s outgoings. In some cases, this will be loans or liabilities so it’s really important your net profit is performing to the level you need.

Overheads = The costs associated with running your business

In running a business, all these other expenses are called your overheads. Theoretically, once your business is operational, and you are smart about your spending, your overheads are generally set, and there isn’t much opportunity to reduce these. 

We will always keep an eye on these numbers, though, as there can always be a discussion around efficiencies, ensuring anything you are paying for is adding value to your business and, most importantly, looking for any easy wins on saving money for you.

Breakeven Point = the amount of sale you need to generate to cover all costs

This is up there with one of the first things we look at with our business clients.  Your Breakeven point is ensuring that we know, at a bare minimum, what it is you need to generate in sales to meet all the expenses (both costs to make your products and overheads) of the business.

We believe it’s important for our clients to know this number always so if they are tracking sales regularly, they are instantly aware if they are skating on thin ice and having a tight week, month or quarter.

Cash Breakeven Point = the amount of sales you need to generate to cover all costs and loans

Yep, this is different to the above. This one only applies if you have loans or debts you are paying for from your profits.  Examples of this include car finance, equipment finance, ATO payment plans or business purchases debts.

If this is the case for you, we won’t focus on your breakeven point but rather your cash breakeven point so we take into account those extra obligations you have.

Knowing and understanding your numbers is so powerful to having a profitable business.  If you are not a numbers person though, that’s OK.  That is why we are here and we offer customized services to ensure your numbers are being tracked and give you the information you need to run your business.  If this gets your excited and you want to meet one of our experienced Accountants, please call us today for a complimentary chat 07 3124 0244.

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