We hear the phrase “know your numbers” all the time and let’s be honest- that phrase is vague at best. Know your numbers…what numbers? How do you even get to know numbers (is this like a first date situation)? Is there more after you “know” your numbers? And does this *really* help your business?
Know your numbers = pretty damn confusing.
I hate how confusing language around money creates a club of those who get it and those who don’t. But, I begrudgingly have to admit, that understanding what’s happening with the money in your business (aka know your numbers) IS crucial to your business’ success.
There’s powerful information in your money/numbers. If you learn how to collect and analyze that information you can use it to make better business decisions. You can use it communicate with your business when you’re unsure about the next right action. And you can use it to dramatically transform the success of your business.There’s powerful information in your money/numbers.Click To Tweet
What does it mean to know your numbers?
First, let’s clear the fog around the phrase “know your numbers.” Knowing your numbers simply means understanding what’s going on with your business finances. For most people, this information comes via a Profit & Loss report (among others). Which means you need to have some kind of record keeping system for your business.
Before you start worrying too much about needing a fancy bookkeeping system, you can know your numbers by just using a spreadsheet or paper tracking sheet. What’s more important is that whatever system you’re using is accurate and up to date.
What numbers should you focus on knowing?
There’s a lot of numbers in your business and there can be A LOT to focus on. When you’re just starting out, focus on understanding the most basic numbers:
Income: Income is not just how much you make but how you make it and when. It can be how much you made from certain products or services and how much you made in a given time frame. AND it can be how much Product #1 made in January vs Product #2 in January. See how we’re starting to combine things? That’s knowing your numbers.
Expenses: Just like income, there’s the total you spent and then there’s breaking your expenses down even further. Which means HOW MUCH you’re spending in each spending category and WHEN you spend. This is especially helpful for cash flow management– if you spend the most in October then you know you need to have extra money to cover those expenses.
Net Income: Net income is your business’ profit. It’s what’s leftover after you subtract what you spent (expenses) from what you earned (income). Your net income is one of THE most important numbers in your business. Again, you can look at your total net income but you can also look at your net income in any given time period.
What you can ask your business
Now that we understand what numbers you’re supposed to know, let’s talk about what you can do with this information. This is where the magic happens and how you can use your money to make impactful decisions for your business.
I like to think of “knowing your numbers” as talking to your business through your money. Meaning, you can ask your business questions and actually get a response! It’s like the Ouija Board for your biz!
Questions you can answer when you know your numbers:
Is my business model sustainable?
This question is about if your business is sustainable for the future. To answer it look at you net income year to date and break it out by month.
Is your net income positive (which means your business is profitable)? Or is it negative (which means you’re operating at a loss)?
Don’t worry if you have a few months where your net income is negative- that happens to all of us. It’s more about the trends and patterns. If every month your net income is negative that’s a sign that your current business model isn’t working.
Another thing to look at is how much your net income is every month. Is it enough to save for taxes and pay yourself as an owner? You may be profitable, but if you’re only profiting $100/month you can’t really live off that- which means your model isn’t sustainable.
What products should I focus on?
This is one of those questions that can be a game changer for your business. If you know which of your products is the most profitable then you can determine where to focus your energy.
To answer this question compare your income streams on two levels. The first level is the broad, overarching level. This is what we consider a parent income category like Services, Digital Products, Physical Products, and Affiliate Income.
Comparing these broad income categories shows you how you make your money and if you should focus your energy on services or products.
The second level is comparing the details of each of the income categories. The details are everything that falls within these larger categories. For example, under Services you may have Web Design, Copywriting, and Logo Design. Examining which of these service packages is the most profitable helps you make decisions about amplifying or phasing out these services.
All of this can feel a little abstract, so here’s an example:
Maria is a photographer and earns income from photography services, stock photos, and online courses. When she examines her income she makes 60% from online courses, 30% from photography services, and 10% from stock photos. She decides she wants to phase out of photography services and only offer digital products.
In order to make a smooth financial transition, Maria examines her service based income. 80% of her photography service income is from headshots and 20% is from events. This shows Maria that she can phase out events first without it making a significant impact on her income while she creates an additional online course revenue.
In this example, instead of just throwing things at the wall and hoping they will stick, Maria is making clear, intentional decisions about her business and smarter financial decisions.
Did my investment pay off?
Ever spend a bunch of money on something for your business and wonder if it was really worth is? Well by paying attention to your money you can answer that question!
Finding out if your investment paid off is a lot easier than you think. All you do is look at your income for any given time period and compare it to how much you spent on your business. The time period you look at will depend on your goals and why you made the investment.
Let’s say you invested $2,500 in Facebook Ads for a launch. After your launch, you would look at the number of sales you made and compare it to the ad investment. For example, if you made $20,000 during the launch and your ads drove a portion of those sales, then your investment paid off multiple times over.
But, if you made $4,000 during you launch with a $2,500 ad spend, then your return on investment for the ads were pretty low and they weren’t that effective.
Spending time analyzing your financial investments give you valuable information for the future. You can start replicating what’s working and ditching the things that aren’t- which will lead to a more sustainable and successful business.Spending time analyzing your financial investments give you valuable information for the future.Click To Tweet
One final word about knowing your numbers
When it comes to talking to your business through your money start simple and work your way up to more complicated questions. Many of us aren’t used to engaging with our money and it can be overwhelming the first time you run a report and see a bunch of numbers staring back at you.
Instead of overloading your brain with a bunch of data, give yourself time to learn the language of your business and practice it. You wouldn’t go to a foreign country and expect to speak the language overnight (and if you can do that- teach me your ways!). So you shouldn’t expect yourself to know all the money stuff right away.
The best advice I can give when it comes to knowing your numbers is: Practice daily. Go slow. Let yourself feel confused. Ask for help.
You’ll TOTALLY get there, eventually, I promise.