Business by the numbers – Cont’d

Posted: July 22, 2013 in Up-and-running Business
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The numbers that should be at your fingertips (or at the fingertips of your accountant) were summarized in the previous post. There are additional numbers that you should have or have your accountant prepare and explain for you:

  1. Does your business really generate a (cash) profit? The profit (or loss) that you see each month when you review your P&L statement contains many non-cash (but period) expenses. The cash profit is found by preparing the Statement of Changes in Cash Resources statement. The cash profit allows a business to repay loans, possibly pay a dividend or payback a shareholder loan. The cash profit is the acid test of the business model. Large accounting profits do not necessarily translate into large cash profits.
  2. Fixed Cash Burn Rate (FCBR). This is the total of all fixed cash commitments (rent, payroll, leases, PAC payments, CRA remittances, etc) that are charged to the business bank account regardless of whether one dollar of cash receipts is deposited.  This dollar figure could be surprising and scary but you must know what it is. If your accountant is spending the vast majority of their time on the phone collecting trade receivables – you have a problematic FCBR. If revenue goes flat or declines, your business will be in serious trouble.
  3. Revenue Breakeven Point (BEP). The BEP is found by calculating the Contribution Margin in dollars: Revenue – Variable Expenses. The Contribution Margin in dollars is divided into revenue to arrive at the Contribution Margin in percentage terms. The BEP is then found by dividing the Fixed Expenses / 1 – Contribution Margin(%). A growing business that adds fixed expenses to its income statement and levers its balance sheet could see the BEP rise on a year-over-year basis quicker than the revenue has increased. The BEP increase will foreshadow problems in the FCBR in Item 3.

There is another metric you need to have at your fingertips. I will discuss this and its importance in the next post.

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