Running a business by the numbers
Read your own accounts, and know which number is telling you the truth.
Ends with: The ability to read your own profit and loss and balance sheet, and to know which figure to act on.
These are the standard measures and how to calculate them. They are not a substitute for an accountant, and nothing here addresses your tax position, which depends on your structure.
There is a stage where a business stops being a job and starts being a set of numbers, and most owners arrive there without ever having been taught to read them.
This pathway is for that point. It assumes you already have revenue and are already trading; the starting up questions are covered in the self employment pathway. What it teaches is which figure answers which question, because that is where most of the confusion lives. Profit does not tell you whether you can pay wages next week. Revenue growth does not tell you whether the business is getting better. A healthy margin on a falling asset turnover is a different problem from a thin margin on a fast one.
It starts with the distinction that catches almost everyone, cash against profit, because a profitable business with no cash is the most common way a good business fails. Then the margins, which say whether the work is worth doing, then the efficiency and solvency measures, which say whether the business can carry what it is carrying.
The last three steps are the owner's own decisions rather than the company's: what to pay yourself, whether you can afford to hire, and whether to do a task or delegate it. Those are arithmetic too, and they are the ones most often decided on feel.
Every step here has a calculator, which is unusual for a pathway on this site and is a fair reflection of the subject.
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Cash is not profit
The single most expensive misunderstanding in small business. A profitable month and an empty account happen together more often than anyone expects.
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Gross margin, the first honest number
What is left after the cost of delivering the thing. If this is wrong, nothing downstream can be fixed by selling more.
Work out your own: Gross Margin Calculator 8 min read -
Net margin, after everything
Gross margin can look healthy while net margin is negative. The gap between them is your overhead, and it is controllable.
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What happens if you raise prices
A price rise that loses some customers can still increase profit. Whether it does is a calculation, not a nerve test.
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Managing cash through the year
Most businesses are seasonal in some way, and the shortfall is predictable months before it arrives.
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Can you pay what falls due
The current ratio answers the only question a creditor asks. It is also what a bank looks at before anything else.
Work out your own: Current Ratio Calculator 10 min read -
How much fixed cost you are carrying
Operating leverage decides how violently profit moves when revenue moves. High leverage is excellent going up and brutal going down.
Work out your own: Operating Leverage Calculator 10 min read -
EBIT, and why it exists
Stripping out interest and tax lets you compare the trading performance of a business against another with different debt and structure.
Work out your own: EBIT Calculator 7 min read -
EBITDA, and when it misleads
It is the number buyers quote, and it is also the number that hides capital intensity. Both facts matter if you ever sell.
Work out your own: EBITDA Calculator 7 min read -
How hard your assets work
Two businesses with the same profit and different asset bases are not equally good. This is the measure that separates them.
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Return on what you put in
Every spend competes with every other spend. Return on investment is how they are compared on the same basis.
Work out your own: ROI Calculator 7 min read -
How long until it pays for itself
Discounted payback asks how many years an investment takes to return what it cost, once the time value of money is allowed for. It is the question a return on investment figure does not answer.
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What to pay yourself
Shareholder salary, drawings and dividends are taxed differently and are not interchangeable. Getting this wrong is a year end surprise.
Work out your own: Shareholder Salary Calculator 10 min read -
Whether you can afford someone
The salary is roughly two thirds of what an employee costs. KiwiSaver, ACC, leave and cover make up the rest.
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Do it, or pay someone else to
Your own charge out rate is the price of your hour. Any task worth less than that is worth delegating, and most owners never do the sum.
Work out your own: Hourly Rate Calculator 9 min read
When to stop and get someone else
An accountant earns their fee at two moments: choosing the structure, and the year the numbers change shape. If you are about to hire your first employee, take on debt, or bring in a shareholder, that is the conversation to pay for. Understanding the measures in this pathway makes that conversation shorter and cheaper, which is most of the point of it.
This pathway is information, not financial advice. Rates, thresholds and rules change; every guide carries the date it was last reviewed.
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