Business Advisory

Behind The 7 Key Numbers – Getting Clarity

Clarity The 7 Key Numbers

Most small business owners don’t get their numbers and don’t really understand their financial statements. And the various reports you send out, rarely seem to cut through either.

The Clarity platform condenses the many complicated numbers behind a business into 7 simple, key numbers. Our aim is to make business simple for small business owners and help YOU help your clients understand their numbers, and how to make them better. Effectively giving you the power to tell better stories with numbers.

COO at Clarity, Steven Briginshaw, digs a little deeper into what the 7 Key Numbers are, and why we have chosen them. Let’s dive in:

Revenue Growth Clarity

1. Revenue Growth

The first number we consider important is revenue growth.

This is as it sounds, is looking at the revenue this year/period compared to the previous year/period. At Clarity we prefer to look at figures on a rolling twelve month basis, but you can of course calculate them by reference to the year end.

It’s not just about growth for growth’s sake

The fastest way to grow your bottom line is through revenue growth.  And most businesses do want to grow, so tracking revenue growth is important to make sure that the business is going in the right direction. However, it’s not the be all and end all as you’ll find out, but it’s a good indicator.

As the saying goes, “Revenue for vanity. Profit for sanity.” It’s important that we understand the costs associated with revenue growth and ensure that the company can grow sustainably and not grow broke.

Gross Profit Clarity

2. Gross Profit Percentage

The next number to look at is gross profit percentage.

What we’re looking at here is making sure that the business is generating a good amount of return from its main business activities. Those costs that it incurs to make sales and also deliver the services or goods that they provide. Are these activities providing a reasonable contribution to overheads of the organisation?

In fact, breaking down gross profit by product or service line is a great exercise. It shows what activities or products are generating what contribution and for the efforts involved. It’s often not the service or product lines that you may think, that generates the biggest contribution.

Operating Profit EBITDA Clarity

3. EBITDA percentage

The third number in the Clarity 7 Key Numbers is Operating Profit % (or EBITDA %).

EBITDA is frequently used by investors and bankers and stands for earnings before interest, tax, depreciation, and amortization. Effectively we strip out those costs (interest, tax, depreciation and amortisation) to look at the earnings, or operating profit of the company. This is compared to revenue,  to make sure that the percentage is in line with industry norms, expectations, where the business needs to be.

EBITDA is also often used when valuing a company.  The valuation is arrived at by multiplying EBITDA by a suitable number/multiple (often between 2 to 7 for most small businesses – although this can increase significantly for some companies).

Revenue per employee Clarity

4. Revenue per employee

Revenue per employee is one of our favourite numbers, because it doesn’t just look at the one faction of the business, it looks at lots of different things.

It’s looking at revenue and related employee costs. It’s also looking at employee capacity and productivity and are the team using the systems and processes correctly? Do they have enough training? Are they using the right tools?

It’s a holistic number that looks at many different areas of the business, and not just in isolation. Using revenue per employee results in a really joined up approach to running the business and it is often effected by the culture that exists within in the business.

Core Cash Target Clarity

5. Core cash target

The fifth number is core cash target.

It is a universal measure of a string sustainable balance sheet and hence business. Core cash target looks at the amount of cash that ideally the business will keep on hand before starting new projects or paying shareholders more dividends etc. It looks at the total taxes due and adds an element of overheads as a buffer. So it’s an amount, or core cash target that the business should have in reserve ideally. And any cash over and above that is surplus and can be used in the future for new projects, for additional payments to the business owners, or for recruiting new team members.

Cash Days Clarity

6. Cash days

Cash days (sometimes known as Cash Conversion Cycle or working capital days).

We’re really looking at four different numbers here;

Accounts receivable days – how long it takes for your customers to pay.
Accounts payable days – how long it takes for you to pay your suppliers.
Inventory days – how long it takes for your inventory, your stock to be turned into cash.
Work in progress days – how quickly your work in progress is turned into cash.

All those four numbers combined are cash days. And that gives you a snapshot of how long it takes for the money to go through your business. And again, it’s an indicator of each of those four component areas. So, it’s a bit like revenue per employee, in that it looks like at a multitude of different areas within your business to make sure that you’re doing the right things in those areas.

Business Return Clarity

7. Business return

The final number is business return.

This number is looking at whether the business is producing a good enough return for your effort? In harsh terms, would you be better getting a job? Or, would you be better putting the money you invested in your business into the bank?

It’s important to make sure that with all the money, hard work and effort you’ve put into your business and the risks in running the business, its is actually producing the type of return that you deserve.

The 7 Key Numbers

From our experience, these seven key numbers are essential for any business.

The 7 Key Numbers are generic enough to be important across all businesses and sectors, but specific enough, when you really start to drill into the numbers, to help specific businesses. They look across all areas of the business and at the key numbers in the profit and loss, balance sheet, cashflow statement and productivity.

Building a better business

These 7 key numbers cover all of the financial aspects of business and give you key insights into how to run, how your business is running, and also how to improve your business. And if you use that knowledge in conjunction with the 5 Levers of Success within Clarity, you can then start to really understand what’s possible or should be achievable for your business. It’s about understanding the gap between where you are now and where you could get. And  when you know that, you can put some plans together and target some goals to help you really get to your ideal business. All that’s left is measuring performance against targets and being held accountable to your actions.

Like what you see?

To find out more about the 7 key numbers, why they are important, how they relate to one another and what you need to consider to improve your business, head to this special 7 key numbers webinar here: https://www.youtube.com/watch?v=4pvpkvBPC4c&t=23s

If you’d like to understand how you can automatically calculate these numbers for your clients or business, how you can use them to see what’s possible and how you can create plans at the touch of a button, book a demo with one of the team here https://pages.clarity-hq.com/book-a-demo 

the Clarity platf

About Clarity

Effortless Advisory | Powerful Results

If you think Clarity is just a piece of software, you’re missing the point. It’s a mindset shift, a different way of doing business.

If you think Clarity is just about business advisory, you’re also missing the point. It’s way more than business advisory, it totally changes your firm’s story and that of your clients.

Finally, a joined-up platform that truly enables you to scale business advisory services within your firm.  It’s been built by accountants for accountants. Award-winning accountants that have small business within their DNA.

Revolutionary approach

Rather than take a traditional approach, we have completely revolutionised the business advisory process for small business owners. Our end-to-end business advisory platform and member success team give you:

  • the structure and processes to deliver;
  • build confidence and engage the team;
  • save time; and
  • do all of this is a way that ensures your small business clients finally ‘get it’.

Making it easier and more profitable for the firm, at a price your small business clients can afford!

For more information or to book a demo visit clarity-hq.com

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