What do I mean when I say you need to know your numbers? Let me explain. You pull out your favourite pair of jeans that you haven’t worn for a while, and you can’t quite get the zip up. No, they haven’t shrunk, you have grown. So you decide to do something about it. Off you go to the gym (or Weight Watchers) and what is the one of first thing that happens? You get weighed, then the tape measure and fat pinchers come out. At the end of that first session, you know your numbers!
You may not like them, but at least you have established a starting point to improve upon. You were probably also asked what you would like to achieve so the appropriate plan can be put in place. You will have picked some more numbers so you know where you want to get to.
It is exactly the same with your money. You need to know your numbers. You need to know what comes in, what goes out. What you own and what you owe (your personal balance sheet).
I am amazed at the number of business owners who don’t know their numbers. I was talking to a contractor, who told me he was a contractor so he ‘didn’t have to worry about that sort of thing’. No wonder he wasn’t where he wanted to be in business or in life.
If you are an employee, it is easier to know your numbers. You have certainty about what is coming in, you just need to work on the going out bit. There are plenty of apps and programmes that can help you do that and then put a money plan in place accordingly.
But do you know what you are worth? Regardless of where your income comes from, this is the difference between what you own and what you owe. This is a very important number as it is a measure of your wealth.
When you first start out, it is quite possible this number will be negative. Particularly if you have student loans, credit card debt and not very much on the other side, like a house, car, or retirement savings. The goal is to get that number into the positive as soon as possible and keep growing it as you add more to what you own and less to what you owe.
For a business owner the calculation is a little more difficult, as you have to do the calculations twice. Once for your business. You should have your monthly business profit and loss and cash flow statement at your fingertips, this shows what is coming in and going out. If you don’t know this, you need to talk to your accountant and start finding out. Your business will also have a balance sheet of what you own and what you owe and how much of it is yours.
Then you need to look at your personal situation, how much are you taking out of the business, and where is it going, and what does your personal balance sheet look like?
I have had some very interesting conversations with business owners that go like this:
“My accountant told me my business made $60,000 last year.”
“Great,” I say, “how much do you spend personally?”
Frequently there is a blank look on their faces, they just don’t know. So we have a look at the numbers and it comes as a shock to them when I tell them they are spending $100,000 on their lifestyle and personal debt.
“How can this be?” they ask.
Then we look at what they own and what they owe and find the savings have gone down and the credit card debt has gone up. Their wealth has gone backwards to support their lifestyle.
Now they know their numbers, they have a couple of options.
- Reduce their personal spending
- Increase the profit of the business
Which would you choose?
If you don’t know your numbers, you are flying blind (in a financial sense), you can’t move forward unless you know where you are now, and how you are going to get to where you want to be.
If you want to know more about how to work out your own numbers, or need some help interpreting them, feel free to drop us a line.