# Five numbers you need to know

### 1. Reconciled cash balance

• The starting point to manage cash flow
• Tells you where you stand, and if you’ve got cash to meet immediate costs
• Easy to calculate with accounting software like MYOB and Quicken
• Or check your bank account balance (online system like CommBiz is a must for this). Deduct any cheques written or payments made that haven't cleared like salaries, rent or regular bills. Then add back cheques deposited and other unprocessed receipts

### 2. Days sales outstanding (DSO)

• Tells you how long, on average, it takes you to get paid after issuing an invoice
• If you give credit, it reveals the efficiency of your collection policies and can act as a warning you could be heading into cash flow difficulties

Here’s how it’s calculated:

Days Sales outstanding = Total receivables outstanding x number of days in period
Total credit sales (over the period)

Example:

If you have annual credit sales of \$547,500 and \$60,000 in accounts receivable, then:

Days Sales outstanding = \$60000 x365
\$547,500

= 40

• Track DSO and try to drive the number down
• Even if sales increase, DSO should stay the same. If it increases, find out why, then get it down
• Try improving invoicing process, negotiating better terms with customers, or invoicing for progress payments synchronised with your clients’ payment cycles

### 3. Break-even point

• The point at which revenues exactly cover expenses
• Start by calculating:
• Fixed costs  such as wages, rent, leases and administrative costs. They don’t include the variable costs of sales. E.g. \$100,000 a year
• Gross profit margin – the percentage of each sale left over after costs of that sale have been covered. It equals total sales minus variable costs, as a percentage. E.g. If you’re selling a toy for \$100 which cost \$60, the gross profit is \$40 and the gross profit margin is 40 per cent
• Now you can work out how many sales you need to make to break even:

Break-even point = Fixed costs ÷ Gross profit margin

• Using the figures above: Break-even point = \$100,000 ÷ 40% = \$250,000
• You need to sell \$250,000 worth of toys to break even each year
• Break-even analysis helps you work out:
• How far sales can drop before you start making a loss
• Units you need to sell before you start making a profit
• Effects of changing your price or volume of sales
• If costs increase, how much you have to sell at current prices to cover costs

### 4. Margins

Don’t confuse margin with mark-up. Margin is expressed as a percentage of the selling price:

Margin = Gross profit x 100

Sales

Mark-up is expressed as a percentage of the cost price:

Mark-up = Gross profit x 100
Cost

Example

If a new product costs \$100 to buy and you need to make 40 per cent to break even, how much do you sell the product for? The answer is \$166.70, since a profit of \$66.70 on a \$166.70 sale gives you a margin of 40 per cent.

Knowing which of your products and services have the highest margin and are therefore most profitable allows you to make the most of them.

### 5. Your special industry number

Every industry has one which helps you compare with your peers, measure your business’s success, and identify problems. Here are examples:

• Restaurants – covers per night, wastage
• Services – staff utilisation rates
• Hotels – occupancy rates
• Builders – work in progress, progress payments due
• Retail – sales per metre of floor space

Learn about the pros and cons of the different finance options to avoid a cash flow crisis when you’re expanding your business

### Financial planning

How to calculate set-up costs, prepare forecasts and produce a break-even analysis.

### Self-employed to entrepreneur

As your business grows, your role will change. You’ll be leaving the day-to-day operations to others so you can focus on the bigger picture. But how do you make the journey from self-employed to entrepreneur?

## Related products

Self-service online savings account that pays high interest on the full balance when \$10,000 or more is held in the account.