Terminology Time – A Guide to Knowing Your Numbers, Part 1

You must always know your numbers in your business. IF you do not know your numbers in your business, then the business is just a hobby. I know that sounds harsh; it’s the reality. This doesn’t mean to give up, but rather lean into and embrace your numbers. Let them tell you a story!

Sometimes revisiting the basics makes all the difference in evaluating your company, your progress and ultimately your growth. Setting yourself up to know your numbers is key. It can be daunting to learn the terminology and the breakdown of what matters and why, so I am sharing a guide to walk you through the basics of understanding your numbers.

Let’s start with the #1 reason companies fail.

Overhead was too high for sales to cover costs.

  • Overhead: anything in the cost of doing business that is NOT related to product creation, marketing, or sales. Anything “not” actively involved in creating momentum to move the business forward. (ie/ rent, healthcare, office supplies, salaries for “non-sales” individuals). **Always be reluctant to add costs to your overhead.
  • Profit and Loss Statement (P&L Statment): This is a snapshot that shows your revenue (sales), expenses, & profits on a monthly, quarterly, and annual (yearly) basis. TIP: Your payroll/personnel costs should always be 50% or less of your net sales (revenue).
  • Gross versus Net Sales (REVENUE): Gross Sales are “top line” revenue BEFORE any discounts or adjustments. TIP: Stronger profits require less adjustments and discounts.
  • Gross versus Net Profits: Gross profits are the dollars left over after ALL expense have been paid but before EBITDA (see below). Net Profit is the remaining dollars left over after all expenses, EBITDA, & bonuses are paid out.
  • EBITDA (pronounced “ebbitdah”): Earnings Before Interest Payments, Taxes, Depreciation, and Amortization.
    • You can use one of two formulas to calculate EBITDA: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization; Or. EBITDA = EBIT + Depreciation + Amortization.
  • Average Order Value (AOV): When calculating your future sales, it is important to have a good idea on your Average Order Value (AOV). For instance, if your AOV is $50.00, you know that you need to have 1000 sales to make $50,000 for that particular period of time. This is often calculated as “net” only. AOV after discounts have been taken.
  • Run Rate: This is a tool to see what you should expect in “net” sales for the day, week, month, quarter, and/or year. You can use it to forecast your trends and make changes as necessary. For instance, if you know you are selling 20 Widgets per day and there are 30 days in the month, you would sell 600 Widgets that month.
    1. If you know your average Widget price is $10, then you can plan to have “net sales” of $6000 for that month.
    2. 20 Widgets x 30 days = 600
    3. 600 widgets x $10 = $6000
    4. This method can be applied using AOV in addition to service based businesses. You simply utilize the average number of business days per month.
  • Same Store Sales/Profit Growth: This focuses on year over year growth keeping the benchmark the same. For instance, you can use this as it relates to a brick & mortar, a specific stream of revenue OR different divisions within your business.
    • Example:
      • Year 1 – Store posted $50,000 in net sales
      • Year 2 – Store posted $70,000 in net sales
    • The same store sales growth was 40%. ($20,000 increase over Year 1)
    • As you grow, research your industry’s benchmarks. Early in your sales cycle, these growth patterns will be high.
  • Balance Sheet: a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. This shows the health of your organization.
  • Budgeting: an exercise to plan for your company’s future growth. This involves using all your existing data combined with industry trends for the future.
  • Forecasting: an exercise to predict what the company intends to achieve in a period of time. This is often focused on sales and profits.
  • General Acronyms (you might hear and wonder….)

    1. MTD = Month to Date
    2. YTD = Year to Date
    3. EOM = End of Month
    4. EOY = End of Year

Study and save this guide as you get to know your numbers. It may seem daunting at first, but it will only benefit you and your business long-term to know where your numbers stand on a daily basis. For more business terminology, keep an eye out for Terminology Time: Part 2!