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Counting The Cost Guide To Business Maths

The document provides a beginner's guide to understanding basic business math concepts like income, expenses, cashflow, and balance sheets to track costs, monitor profit margins, and identify trends. It explains how to calculate gross profit margins and use them to identify issues if they are decreasing over time. The key is regularly reviewing financial reports and metrics to gain insights into the health and performance of the business.

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Kevin Romero
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144 views4 pages

Counting The Cost Guide To Business Maths

The document provides a beginner's guide to understanding basic business math concepts like income, expenses, cashflow, and balance sheets to track costs, monitor profit margins, and identify trends. It explains how to calculate gross profit margins and use them to identify issues if they are decreasing over time. The key is regularly reviewing financial reports and metrics to gain insights into the health and performance of the business.

Uploaded by

Kevin Romero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Counting the cost ...

a beginner's guide to
business maths
You don’t have to be a maths master, with a few easy steps you can
track costs, monitor gross profit margins and understand trends

Johnny Martin

Author and numbers coach

Tue 6 Dec 2016 07.30 GMTLast modified on Thu 6 Apr 2017 15.05 BST

While technology can help, understanding the numbers can give entrepreneurs insight into
the health of their business. Photograph: Alamy Stock Photo

If you want to generate more cash flow for your business or break even faster, a basic
understanding of business maths is going to really help you.

However, getting to grips with the numbers can be one of the biggest pain points
when running a business – particularly if you feel it’s not your forte. As well as the
dreaded figures, there’s also the jargon that accountants, tax officials and “useful”
software packages delight in using.

To understand how your business is doing and how you can better steer it to
profitability, you just need to know three things:

• Income and expenses


• Cashflow
• What the business owns and owes
This information is contained in three reports – the profit and loss, the cashflow
forecast and the balance sheet – all of which can be created via accounting software
using your transaction history.

The good news is modern generation accounting packages such as Xero, QuickBooks
and FreeAgent are much easier to use than the desktop software they replace. If you
can use MailChimp or Eventbrite, you will be well placed to tackle online accounting
software.

Once you have your numbers, what are you looking for? Rather than being reassured
that sales and profit are increasing, you should look for trends to reveal what’s really
going on with your business.

The power of trends

Tracking the numbers.

Most eyes will naturally be drawn to the gross profit figure. This is profit after cost
of sales (basically after the cost of your raw materials) but before your overheads like
rent, marketing and accounting. In this example, we can see that sales and gross
profit are rising. However, if you express gross profit as a percentage of sales – or
gross profit margin – what is the trend?

To calculate this figure, take the gross profit for the period and divide that number
by sales over the same timeframe. Then multiply by 100 to make it a percentage.

In the case of the above example, the gross profit of year three is 60%
(£120,000/£200,000 x 100 = 60%). Now do the same for years one and two so that
you can compare.

Adding gross profit margin percentage.


We can see that although gross profit is rising in money terms, gross profit margin
is falling each year. That means the business is making less gross profit per sale.
While sales are rising, the cost of sale is rising faster.

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Being aware of such a downward trend is the first step towards identifying whether
or not your business has a problem that needs to be solved. Investigate – ask
yourself, why is this? Do these numbers make sense? Maybe you decided to reduce
the price to boost sales or you gave an important client a significant discount; maybe
the ingredients are costing more, or there are portion control issues, or instances of
fraud.

Tracking the gross profit margin is crucial if you are to understand how much value
you have retained in the business. It is this gross profit that goes towards covering
your overheads.

You can also track net profit (profit after all costs including overheads), or particular
expenses in the same way to reveal other issues within the business. For example, if
you track labour costs as a percentage of sales across a number of months, this will
show you if your team are becoming more or less efficient.

Mastering business maths and tracking trends will help you to drill down to the nuts
and bolts of the business and make informed decisions about pricing, costs and
revenue.

The challenge is setting time aside to review your business numbers. My best advice
for this is to create a financial routine. Make every Friday a finance day and spend it
reviewing the numbers. Time spent on the business maths side of your business will
pay dividends – literally.

• Johnny Martin is the author of Understanding your Business Finances


Workbook and runs regular workshops at the Business & IP Centre at the
British Library.

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