Today, Kelsey joins me to chat about metrics, specifically the three key numbers every business owner should know and track.
There are tons of KPIs (key performance indicators) to gauge your business’s performance, but sometimes it’s best to keep it simple. The three KPIs you absolutely need to know are gross profit, net profit, and average monthly cash output. Listen as we break down these basic metrics and explain why it’s important to understand them.
In this episode, Kelsey and I also discuss:
- How to keep your metrics simple and why keeping it simple can be helpful | 1:45
- The three numbers you need to know for your business | 4:14
- What is gross profit, how to calculate and track it, and what it tells you | 4:43
- What is net profit, how to track it, and why it’s important | 12:10
- What is the average monthly cash output, how to calculate it, and what it can tell you | 16:34
- How often you should look at your metrics and analyze the numbers | 21:10
- Common mistakes business owners make when looking at their numbers | 23:47
Things mentioned in the episode:
- Downloadable Worksheet | https://kickstartaccountinginc.com/3numbers
- Episode 68 – Why You Need a Budget | https://kickstartaccountinginc.com/ep-68-why-you-need-a-budget/
- Episode 79 – Forget Goals! Create Intentions and Measure Your Success in these Definitive Ways throughout the Year | https://kickstartaccountinginc.com/ep-79-how-to-get-motivated-this-new-year-without-setting-goals/
Need help understanding your numbers to track metrics? Join our Finance Framework Program and be a part of a community for business owners who want to take control of their financials! Enroll today!
The Finance Framework | https://www.kickstartaccountinginc.com/framework
Connect with Danielle:
Website | https://www.kickstartaccountinginc.net/
Facebook | https://www.facebook.com/kickstartaccountinginc/
Instagram | https://www.instagram.com/kickstartaccounting
Twitter | https://twitter.com/KickstartAcct
Book your FREE Discovery call: https://kickstartaccountinginc.com/book-a-call/
Test your Financial Health: https://kickstartaccountinginc.com/checkmyfinancialhealth/
Learn how to pay yourself as a CEO – https://www.kickstartaccountinginc.com/getpaid
Full Episode Transcript:
Intro 00:02
Welcome to Entrepreneur Money Stories, the podcast for women entrepreneurs who want to dig into their money stories so they can break free from limiting beliefs around money once and for all. Hosted by Daniel Hayden, owner of kickstart accounting. This podcast is a series of real conversations about money mindset, with valuable and action packed takeaways for the entrepreneur who's building their abundant empire. Danielle is a reformed corporate CFO is on a mission to help rule breaking female entrepreneurs understand their numbers. And gain the confidence to create sustainable profits. And now here's your host, Danielle Hayden.
Danielle Hayden 00:40
Welcome back to another episode of Entrepreneur Money Stories. Kelsey, welcome back to the show. Thank you for being here.
Kelsey Chester 00:47
Thank you.
Danielle Hayden 00:49
So for anybody who is new to the show, Kelsey is our lead Account Manager here at kickstart accounting, Inc. and Kelsey has been with kickstart for a really long time and has worked with a lot of clients over the years. And so she is a wealth of knowledge in helping small business owners understand their numbers so that you can make the best business decision. So I love when I have the opportunity to have Kelsey on the show that you have not just my expertise, but both of our expertise so we can go into these topics, topics deeper. So thank you.
Kelsey Chester 01:24
Thank you. I always love being here and being able to share the experiences that I've had with our clients and be able to bring it to all of you guys.
Danielle Hayden 01:32
So today we are going to be talking about the three numbers that every business needs to know. And we really wanted to keep this really simple. So I actually did a little bit of research and I wanted to keep this in here because I thought it was funny. I had no idea. So if you've heard the acronym Kiss, kiss, and you know some people say keep it simple, stupid. Some people are a little bit nicer, sister. But hers was interesting that it's really an acronym for keep it simple, stupid. That's where it came from. And it's a design principle noted by the US Navy in 1960. And it's really a principle that dates that most systems work best if they are kept simple rather than made complicated. Therefore simplicity should be a key goal in design in unnecessary complexity should be avoided at all costs. So directly from Wikipedia, but I thought that was a really interesting way of thinking about keeping it simple. In today's world, I think we want to have the the leg up right or do something a little bit different than every other business owner. And if we are able to look at things a little bit different or tweak our systems, tweak our processes will be bigger, better or different from our competitors and other business owners. But maybe we need to keep it really simple when we're looking at our numbers so that it allows us to really actually use the information and forget all the complexity. Forget all the complicated KPIs and fancy documents and really keep it simple.
Kelsey Chester 03:18
That's right. I know even I'm guilty of you know, let's just do this one more thing, and it will be that much better. But this is really just about bringing it back to basics.
Danielle Hayden 03:27
Yeah, that's the basics. I love the idea that when we can keep on practicing the basics, we can become the experts. And it's not it's not a fancy moves. It's not the fancy tools. It's really the basics that are going to help us see the biggest results. It's going to help us notice the trends. It's going to help us not get confused, right and especially when we're talking about money. It's pretty freakin important. There's a lot of confusion in this area. So let's keep it simple. Avoid the complexity and allow ourselves to just understand this information. All right, so Kelsey, what are the mysterious three numbers? Let's go through them and then we'll dive into each one.
Kelsey Chester 04:15
Drumroll please. The first one is gross profit. All right, and then we're gonna go into net profit. And the third one is average monthly cash output. All right, let's say Well,
Danielle Hayden 04:29
That was a ton of accounting words.
Kelsey Chester 04:33
So, we've got to
Danielle Hayden 04:35
Yeah, we're gonna break down each one in detail. So our first one is gross profit. So when we think about how to calculate gross profit, I want to be really clear that this is a number that you can get directly out of your accounting system. So I'm not asking you to make a nother fancy calculation or please don't use the excuse. I'm not good at math. There's nothing that you need to do. Right so you're going to go into your accounting system, and you are going to run your profit and loss by month, preferably for the last 12 months. So you might have it for only three months, six months. You might have it for two years, but I'd really like for you to look at it and the last 12 months and you couldn't really get this from for both of these numbers. So, Kelsey, walk us through how does QuickBooks actually calculate the gross profit? And how can we make sure that our QuickBooks is set up in a way that's going to allow us to calculate this
Kelsey Chester 05:37
gross profit is really just made up of your gross income minus any direct costs associated with your product or service. So there is a line item on your profit and loss statement that says gross profits, and it's just right there below income minus cost of goods sold, which is those direct costs that I talked about? And that will give you your gross profit. So a
Danielle Hayden 06:02
lot of people will say, to me, there's a lot of confusion on what's direct costs. So what should be up in cost of goods sold and what should be done in operating expenses? And I want to give you just like some very clear boundaries for each and you might be working with a business coach or consultant who sees this a little bit differently. I have seen throughout the years that there can be some gray here. So direct costs are anything that you need, in order to be able to sell or serve your clients. So at the cost, right, so any inventory that you need to buy from another vendor, or anyone that you need to pay in order to be able to deliver that that goods or service. Don't forget packaging, shipping and then anybody to actually package your material or actually deliver your service.
Kelsey Chester 06:57
Anything I'm missing. I'm just going to elaborate a little bit it's easier to differentiate what is it direct costs versus what is an operating costs, which is those costs necessary to keep the business going? With a product based business. It gets a little muddy with a service based businesses, especially when it comes to labor. So if you have you know, some administrative staff, maybe a virtual assistant that is going to go down in your operating expenses, not as a direct cost, not as cost of goods sold. If you're going to put labor and cost of goods sold. It's going to be someone working directly with the client directly delivering your service.
Danielle Hayden 07:37
Yeah, that's a really good point. Thanks for bringing that up. One other thing I'll mention on that is how much time and effort do we put into categorizing this? So when we work with a lot of our clients, a lot of small business owners, you know, Kelsey knows
Kelsey Chester 07:54
we are nodding my head like yep, I know exactly what this is.
Danielle Hayden 07:59
We wear all the hats and in a small business, our clients and their team members wear a lot of hats. And that's great, right? That is that is that is what we want. However, I don't want you spending a lot of time and energy saying well employee a spent 30% of their time with clients 30% in marketing and 30% as an assistant, it's really important to choose the majority. So if a majority of their time is client service than it can be direct labor, and if a majority of their time is spent in the back end of your business, so running the operations, then we want to consider them an operating
Kelsey Chester 08:40
it's important to note that whether it's a direct service cost or an operating costs on your books does not affect your bottom line.
Danielle Hayden 08:47
Hello entrepreneur money started listeners. We would like to kindly interrupt your show to invite you to our first e Suite program. We finance framework, the finance framework will include weekly training videos, access to our exclusive resource library live q&a is with the Kickstarter county account managers and access to meet your CFO expert to learn more and gain exclusive access visit Kickstarter county inc.com/framework This program will sell out we're only offering a limited amount of seats so do not let this opportunity pass you by again. Kickstart accounting.com/framework Alright, so gross profit. That's how you calculate it right? So gross revenue minus your direct costs again, come to straight out of your accounting software. But if you don't have an accounting software once you'd be able to get to the numbers stuff. You're gonna look at that number for the last 12 months and you're gonna track it in the future. But Kelsey, what can this number tell you right? So when we look at this number, and reflect on it over last 12 months? What what what can someone actually do with that?
Kelsey Chester 09:57
Well, there's a couple of things we want to track one, what is our gross profit compared to those direct costs? So if our gross profit is 30%, that doesn't give you a lot of wiggle room for your operating expenses. So your direct costs are probably a little higher than they should be for what would be considered a healthy business. And that would be a great area of focus and area of improvement to work on. Another is trends and gross profit is your gross profit decreasing as time goes on, or is it increasing? Obviously, I want it to be you know, increasing as time goes on as you really refine the direct costs that go into selling your product or service
Kelsey Chester 10:42
and less it's increasing because you're doing more,
Kelsey Chester 10:46
very through their seasons on your resume. And there's, you know, reasons why certain things are the way that you some of the trends are the way that they are so just be able to recognize that and being able to find a source of that will tell you whether that is an acceptable increase or whether it's something to work on.
Danielle Hayden 11:07
Yeah, these are data points. So I really like to think of all these numbers as data points that you can then reflect on so if you have a seasonality where your costs are going up, you can start to ask yourself why. Now, you can ask yourself why right so it's not always it's not always good or bad. It might be that you're working too much in the business and not getting enough of that support. And that's why costs are low. It might be that you finally got the help that you needed. And this is the new normal and we need to give it time so that's why we're going backwards. We're gonna look at the seasons and then we're going to keep tracking this in the future. So it can help us see into the future right then we're going to need to see you use these numbers to actually see into the into the future.
Kelsey Chester 11:53
So by doing this analysis, you have the metrics, and then it's analyzing those it gives you the information that you need to you know, decide what your best next action is.
Danielle Hayden 12:05
Alright, net profit. This I don't know why this one's This one's kind of my favorite. But I think it's because you hear we talk about profitability all the time and in order for us to have healthy, sustainable businesses, we have to be profitable, we cannot take a loss month over month we have to be able to be profitable in order to be able to be in business for the long haul. And I want you to be in business for the long haul. And if you decide that you want to sell your business at some point in the future, these are the types of metrics that somebody is going to look at to see is this business viable, right, can this business continue on and move forward? So the net profit again, you can use your accounting software, you're gonna run that same report so you don't have to run anything new, the same report. You're gonna zip all the way to the bottom. It's a very last line of your income statement. Yeah, and this calculation, if you're doing it on your own, it's going to be a little bit more complex. Because you're, you're gonna take your gross profit and then you're in a minus all of your operating expenses. So everything else it costs you to run your business. So this one might be a little bit harder to actually calculate outside of the system. Do you agree?
Kelsey Chester 13:16
Definitely. There's there's just a lot more that goes into it for sure. Yeah,
Danielle Hayden 13:19
yeah. So this net profit year to look at it for the last 12 months, causing what do you think has been some of the best revelations that you've seen from clients when they start to look at their profitability over time?
Kelsey Chester 13:32
Well, profitability is kind of the end all be all for the health of your business. Yeah, you can have extremely high direct costs, get extremely low operating expenses and have a healthy net profit. And while you have a healthy business, so you know, I would say, Stop focusing so much on the top line revenue and more on profitability. It is possible while I don't think it's the norm, it is possible to have a very straight line income but if you are, like I mentioned before, refining your expenses, whether they're derived operating all of that and reducing those, you can still take home more.
Danielle Hayden 14:15
Yeah, you know, I think when I look at our we call them narratives, so all of our clients at the end of the month they get all their financial reports, and we give them a highlight reel or narrative. So it's basically just pointing out to them in a simple way. Okay, business owners, this is the numbers that you need to pay attention to. Here are some of the fluctuations that need your attention. And when I look at the way we do our narratives, and when we're working with our team, one thing that we talked about is, if we have a loss, we need to look at why right? So this is the number that you use to gauge all of your other decisions. So if you're trending towards a loss or you have a loss, it is an opportunity for you as the CEO to understand why you have the loss. And if you are profitable, one time out, like celebrate right so we need to celebrate first and then we need to reflect on what's working so on the month that are really profitable. Is this a fluke? This is a timing of an invoice. Is this a trend that we can expect to continue to replicate itself and therefore we can pay ourselves more we can pay our team more, we can start to add on staff members. So both directions whether it's a profit or a loss it's an opportunity to reflect on is this a fluke, right? Is this a one time situation or is it a trend and we need to start to spot it?
Kelsey Chester 15:44
recognizing those trends is really important? Because you can if you notice that hey, over the last six months, my net profit has really started to increase what did I do differently in those six months that I can really hone in on? And hopefully
Danielle Hayden 15:58
you're talking to your money team and they're asking you these types of coaching questions. So I see you have this profit, what words If not, I want you to ask yourself those Coaching Questions. Whatever right you can say, Wow, this profit feels really good. Or I'm exhausted, right? I might be profitable, but I am wiped, this is not sustainable. And then you can determine your next steps. I'm really excited about this last one because it's something that we talk about internally, a lot but we don't talk about on the podcast. Very often. So this is the average monthly cash output. We're going to talk about a few different places to find this number. But Kelsey, walk us through what is the monthly cash output?
Kelsey Chester 16:42
So it's comprised of a few things. So basically, what we're trying to do is we're trying to estimate how much does your business spend on everything throughout that month, so that will be your direct costs. So your cost of goods sold, that will be your operating expenses, but sometimes that's not all that your business spends money on. There are other things that don't show up on the profit and loss statements. That the business spends money on like paying yourself and owners drawers that is on a profit and loss statement, but it's something that a business has to pay for. If you have any loans that is not on the profit and loss statement, but as cash out for your business. Lines of Credit. If you're paying down a credit card that is cash out, is not captured on the profit and loss statement.
Danielle Hayden 17:27
Yeah, I think we forget about that. It's easy for us to say and to look at the income statement and calculate the averages. So on average ice, spending x amount and just direct costs and operating expenses. But we forget that there's a whole balance sheet, right? There's a whole nother financial report that isn't talked about as often right, there's a lot of buzz around the words of revenue and profit and loss and income statement. So it's easy to only pay attention to that report, but this average cash output actually helps you determine what's going towards the balance sheet so you can download directly at Kickstarter Niantic inc.com/three numbers to download the worksheet to actually calculate this form with your with you right so that you have someplace to actually input these numbers. Because this is something that this is a number that I really want you to have on hand. So Kelsey, what what is this number going to tell us? Like why does somebody need to know what their average cash output is?
Kelsey Chester 18:29
So for cash planning, this is going to be really important and for calculating how much you want to have in a savings. So let's say that you have a dip in activity for that month. You have a slow period a little low during the summer. How much do you need to have in the savings to be able to cover everything that the business used to pay for that month? So you know, you might calculate, well, my average operating expenses are $5,000 a month, so I'll just have 13,003 months worth in the savings. Well, that doesn't take into consideration that I need to pay myself and owners jobs for those months. It doesn't take into consideration that I still have to pay down my credit card payment that month, because might
Kelsey Chester 19:15
not care.
Kelsey Chester 19:18
You have the other money set aside.
Kelsey Chester 19:21
Right? And that startup loan that I got I still have to pay for that. So making sure that we are taking into consideration all of the things that our business has to pay for and having that amount set aside so that you can really rest assured that you have the appropriate amount of a cash cushion and your savings.
Danielle Hayden 19:37
Yeah, around here kick started counting. We like to call that our true cash balance. So it's taking your actual cash balance minus three months of your cash output. And that's how much cash you actually have in your in your bank. Right. That's what you have available to spend. And once you know that amount, it can help you make all the other business decisions right so as you think about hiring your first employee or contractor or you're thinking about adding onto your team, now, you know, this is how much I need now. Now if I'm going to add on to that team, I need to have enough saved for maybe three months worth of their salary or their salary plus any of the onboarding costs and if you're not sure about that, we have an episode on how to budget when you are thinking about hiring, so that you know how much to set aside in a savings account. So this number allows you to confidently make any other business decisions because you know that you have the money, right? That's one of the things that we hear from our clients. All the time I feel anxious about hiring because I don't know if I have enough. This allows you to have that competence. And I'm glad you
Kelsey Chester 20:49
brought up about budgeting because this is a forgotten portion of a lot of budgets. I've heard so many newer clients say I made a budget last year but for some reason I just don't have the cash and I thought I would they did not think about all of the items that are not on a profit and loss statement that they need to pay for.
Danielle Hayden 21:07
All right, so now that we know what numbers we need, how often do we look at these?
Kelsey Chester 21:14
As with anything, I would say a minimum of a monthly?
Danielle Hayden 21:18
Yeah, I think our best case scenario with our clients is is monthly. You could look at some of this on a weekly basis. But generally these numbers aren't as available. I mean, if you're keeping your QuickBooks up on a weekly basis, you could pull them weekly. However, I think that this type of number calculation is a better fit for a monthly or quarterly review. This doesn't have to be a fancy review process right but we do need to have this time set aside in our calendar. I love when our clients use us as an accountability partner. So a lot of our clients will book their time with their accounting team. So their bookkeeper or their account manager and have that time set aside and during that time, this is when they look at the last 12 months they reflect on these numbers and we're able to walk them through some of those those coaching questions so know what you need for accountability is it that you need a Money Team in which you can meet with on a monthly basis? Do you need to have that time set aside in your calendar where you're having that CEO time? Remember that the books I really would recommend you do the books at a different time than when you analyze it? Because a lot of us will update QuickBooks and then think, okay, I spent so much time doing that. My job's done. Well, no, now your job just started. So you know, maybe make these two different activities if you're doing your own DIY bookkeeping, where your bookkeeping is done at one point in your analysis have done that another time.
Kelsey Chester 22:55
And I do I do want to add on to that a little bit. So the reason why I say monthly is it allows you to keep a closer eye on the trends before three months have already gone by so while quarterly is no okay obviously as often as you are able to, but if you see something that was a drastic change month to month. So if you look at your last month's numbers and you're like, wow, my net profit really decreased compared to the last two months. I'm going to keep an eye on that for next month. And if it happens again, now you know, okay, what is going on here? I need to take a closer look at this without having three months go by.
Danielle Hayden 23:34
Yeah, we don't want to wait three months or you know, an entire tax year where we can't. We can't reflect on it right? It's too late. To do anything about it. So that's a really good point. Thank you. And the other common mistakes that we can think of that business owners are making when they're looking at these numbers.
Kelsey Chester 23:51
Well, I we've talked about this a little bit but I would say one of the biggest common mistakes is doing the bookkeeping and not taking that time to do the analysis. Having the numbers is just step one. Step two is what are these numbers telling me? And then another mistake is not taking appropriate action? Yeah,
Danielle Hayden 24:11
understanding what is happening and then removing some of the emotion from that. You know, I talked about this a lot, because I think it's really important when I worked as a CFO and I recorded a lot of these. These are numbers that I used in my in my deck that went to investors and the board of directors and management team. When we looked at them, we pulled away all the emotion we looked at the facts we then what are the numbers? What can we drive? What can we pull that from the numbers, what is the information that we are gathering, and then we made business decisions? Now not to say that there's no emotion ever right? Because then we said, Does this make sense, right? We're not ruthless. We're not letting people go and terminating contracts. Because we're right. Like, it's not completely removing emotion, but it's having the ability to say, as a business owner, what am I looking at? Let me look at the data of let me look at the quantifiable results and then make the decision and then do a gut check. Right? Is this the right move emotionally for me as well? So it's removing the emotion from that original decision. These are the basic numbers right? So these are the three that if you don't know where to start, these are the three numbers that you can use right now to get started. I truly believe that action creates momentum, and love the saying if you want something done, give it to the person all the time. Unfortunately, my family and my friends know that as well. And I'm very busy.
Kelsey Chester 25:41
From now on, I've always been gay sorry.
Danielle Hayden 25:44
Yeah, right. Maybe he's learning more now. Right. So when you're ready for more, I want you to go back and listen to episode 79. This is an episode we did at the beginning of the year, where we talked about setting intentions for the year. So this isn't goal setting. I'm not saying go set goals and find the metrics. I'm saying look at what your intention is for your business this year and that's understanding what season of the business are you in? Are you in a space where you are looking for hockey stick growth, and you're really investing a lot of money into your business? When you understand that you can find other key performance indicators that are going to help you measure and manage that season of your business. If you're in a season where you are trying to have more of a work life balance and you know you want to have dinner with your kids a few days a week, the KPI might be number of dinners per week, or maybe you're focusing on yourself, right so maybe this is the year that you said I've poured my literally my entire heart and soul into this business. And so I need to get my health back on track. So your KPI might be number of days where you slept well. Went to the gym, right so other priorities so these KPIs, there is a website called 1001 KPIs every business owner should know. And please for the love of God do not ever know 1001 KPIs about your business. It is not necessary. But however, you can pull three to five other KPIs that are going to help you manage and measure the season of business that you're in. We hope
Kelsey Chester 27:27
this was helpful for you. We hope you learned a little something. And we hope that you'll take action and really start to track these three numbers. All we want is for your business to thrive and we just want to give you the tools to make that happen.
Danielle Hayden 27:43
Absolutely. If you need help understanding this information or you have questions, come to Kickstarter county e.com/and book a call. You can talk to Kelsey and I directly again, if you would like to download the worksheet it's kickstarted counting inc.com/three numbers and it's the number three and then the word numbers spelled out. We would love to hear from you. Please rate review and subscribe. We'll continue to show up to be a resource for you and we ask for one thing in return. And that is for you to share this episode with one other entrepreneur who you know needs this information. Alright, until next time,
