Know Your Numbers

One of the greatest weaknesses of a business is their lack of understanding in one simple thing: margin.

Before I get into margin, firstly, I want to talk about another golden word: profit.

I can give some academic explanations of it, but I want to keep it simple, it's how much profit you got from your revenue after deducting costs. There are different ways of shaking it out, but that's basically it.

Profit is what keeps your business going. It's pays for future ventures, enables you to stay in business, attracts investors if you want them, and is a reward for a job-well-done. We can generally agree, profit is good. When you don't have profit, you have loss. Loss is no-good. Profit = you made money. Loss = you lost money. I know some smarty pants is shaking his head at my over-simplified explanation. Bah humbug.

As you are running a business and selling a product or service, you need to know how you are gonna make a profit as operations are operating. One way to keep up with that is to calculate your margin. Margin is basically a ratio that says "for every dollar in sales I make, this is how much profit I make."

Let's use a made-up example, I am a wine label and I sell bottles of wine. I've ran my total expenses (from manufacturing costs, to my branding expenses, to my salary, etc, everything) and it costs me $10 to finally have a customer pick it up and be looking at it on the shelves. If I set a price of $20, that gives me a profit margin of $10. In this case, I have a 50% profit margin. Expenses are half of my revenue.

That sounds simple! Shouldn't every business know this?

Well... Every business should know this, correct. But to give business owners and executive leadership some slack, it can be a little complicated at times. Outlining your costs can be tricky. For example, if you have multiple products and different teams collaborate on them, but not equally, whose salaries do you count as costs toward each product? What happens when you hire more staff? If you have equipment, you need to consider depreciation, an operating cost, which is its own complexities altogether.

Sometimes middle managers and certain figures in leadership can inherit situations in which the costs were never accurately calculated or the numbers they have are outdated. They may not prioritize figuring all their associated costs, because they have been tasked with growth, so acquisition and growing their consumer base becomes their number one priority. The conversation around costs gets kicked to the curb.

Here's the thing though... If you want to make your numbers better, you have to know them in the first place. You can have a plan for growth, but you have to keep in mind if it is profitable growth.

What is an easy way to tell if it is profitable growth? Know your numbers. Know your revenue and your costs. Again, the gap between is called margin. How do you know if your margin is good? For the most part, that is up to you. Are you making enough to pay all your employees and potentially give raises when earned, and have enough to hire new employees? Are you paying yourself a salary or taking draws you think are fair and properly rewarding? Does your business have enough cash on hand for slow seasons or times when costs exceed revenue and you are left with losses? Are you making enough to invest in new technology or equipment to increase your company's value?

If you haven't yet, make a plan. Set goals. Where do you want the business to be in 5, 10, 15, 20 years? Where do YOU want to be in 5, 10, 15, 20 years? Your numbers will help you see if you are on or off track. Not knowing your numbers is like being dropped in the middle of the desert with no compass and no map and just hoping you get to your destination.

If you have a business, you've got to know your numbers.