You do not need to be an accountant to run a business well, but you do need six numbers: revenue, gross margin, net profit, your cash position, debtor days and pipeline value. Those six, looked at once a month on a single page, tell you almost everything about whether the business is working — what it is earning, whether the pricing makes sense, whether it will survive the next quarter and whether there is anything coming next.
Most owners avoid this. The statements look opaque, the terminology is off-putting and the accountant always seems to understand it better than you do, so the financial side gets delegated entirely and the bank balance becomes the only number anyone checks. That is like driving by watching the fuel gauge. This guide defines each of the six in plain words, shows you how to work it out from records you already have, and sets out what to do when one of them moves the wrong way.
Which six numbers should every owner know?
- Revenue. Total income before any costs. The most visible number and the most misleading on its own.
- Gross margin. Revenue less the direct costs of delivering the work, expressed as a percentage. This is where you find out whether the pricing and the cost of delivery actually make sense.
- Net profit. What is left after all costs, including overheads. What the business genuinely earns.
- Cash position. What is in the bank now, and what is expected in and out over the next 13 weeks. The survival number.
- Debtor days. How long your clients take to pay. Every day beyond your terms is your money funding somebody else’s business.
- Pipeline value. Probable revenue over the next 30 to 90 days. The early-warning number.
Three of them look backwards and three look forwards, which is the point of using all six together. Revenue, gross margin and net profit tell you what happened. Cash, debtor days and pipeline tell you what is about to.
Why is revenue the most misleading number you have?
Because it is the one everybody quotes and the one that says least. Revenue tells you how much work you did, not whether the work was worth doing. A business can grow revenue by a third, hire to deliver it, and end the year with less profit and considerably less cash than it started with — which is the single most common pattern in owner-managed businesses.
Revenue only means something when it is paired with margin. “We turned over £900,000” is a fact. “We turned over £900,000 at a 34 per cent gross margin, and the fastest-growing part of that ran at 11 per cent” is a decision waiting to be made.
How do you work out gross margin by job rather than in total?
Total gross margin hides everything interesting. The useful version splits revenue into the three or four types of work you actually do, then puts the direct costs of each — the labour hours, materials and subcontractors that would disappear if that work disappeared — against it.
An illustration of the shape, not a client and not a claimed result. A business bills £40,000 a month across three types of work. Costed honestly, type A runs at a 42 per cent gross margin, type B at 31 per cent and type C at 9 per cent — and type C absorbs nearly half the available hours. In total the business looks like a 29 per cent margin operation and nothing seems wrong. Split three ways, the picture changes completely: almost half the capacity is being spent on the work that pays least. That is a single afternoon of arithmetic, and it regularly changes an owner’s view of their own business in one sitting.
Do it once and you will never look at a total again. The direct-cost line is the part that takes judgement — be strict about it, and if in doubt include the cost, because flattering your own margins is the one mistake that makes the whole exercise pointless. The Five Ways model shows what happens when margin moves alongside the other four levers, and the free Profit Improvement Calculator does that arithmetic for you.
What does net profit actually tell you?
Net profit is what the business earns after everything, and it answers a different question from gross margin. A poor gross margin means the pricing or the cost of delivery is wrong. A good gross margin and a poor net profit means the overheads are too heavy for the size of the business — premises, software, vehicles, a management layer added ahead of the revenue to support it.
Look at both together, because the fix is completely different in each case. And check net profit against your own drawings at least quarterly: a business that pays you more than it earns is being funded by something, usually the tax it has not paid yet.
Why is cash the survival number?
Because profitable businesses go under and unprofitable ones sometimes trade for years. Profit is an accounting measure over a period; cash is what is in the bank on the day the wages are due. The gap between them is timing plus a handful of payments that never appear in a profit and loss account — loan capital, VAT, corporation tax, drawings and money tied up in unpaid invoices.
The practical version of this number is a rolling 13-week forecast, and it is the single most useful financial tool a small business can build. Why profit and cash are not the same walks through how to build one in an afternoon, along with what to do when it shows a bad week eight weeks out.
What are debtor days telling you?
Debtor days is outstanding sales invoices divided by annual sales, multiplied by 365. If your terms say 30 days and the answer is 58, then roughly a month of sales is sitting with your clients instead of with you.
Closing that gap is the cheapest money available to any business. Nobody has to approve it, there is no interest, and the levers are unglamorous: invoice on the day the work is done rather than at month end, chase on a fixed schedule rather than when you remember, take deposits on anything large, and put shorter terms on new clients where the conversation costs nothing. Two weeks off your debtor days in a business billing £480,000 a year releases roughly £18,000 of cash, once, and it stays released.
Why is pipeline the early-warning number?
Because every other number tells you about work you have already done. Pipeline is the only one that tells you about work you have not. If it thins out this month, revenue does not fall this month — it falls in sixty or ninety days, by which point the cause is three months behind you and much harder to fix.
Keep it honest. Pipeline is not everyone you have ever quoted; it is live opportunities with a value, a probability and a date, reviewed every month with the dead ones taken out. An inflated pipeline is worse than no pipeline, because it reassures you at exactly the moment you should be worried.
How do you build a one-page monthly scorecard?
- One page, six rows. The six numbers, nothing else. Anything that does not change a decision comes off.
- Three columns. This month, the same month last year, and your target. Context is what turns a figure into information — £62,000 of revenue means nothing until you know it was £71,000 last year.
- One hour, same date every month. Book it. The discipline matters more than the format, and a scorecard reviewed in month one and abandoned by month three is worse than none because it teaches you that measuring does not help.
- Write one sentence per number. Not a report — one line on why it moved. Writing it forces you to know, and “I do not know why gross margin fell four points” is itself a useful finding.
- Pick one number to work on this quarter. One. All six is a wish list; one is a plan, and the others will still be there next quarter.
The free Wheel of Business gives you the structure if you would rather not build it from scratch. If the whole area feels like someone else’s language, that is precisely what Financial Coaching exists for — regular sessions that build real confidence with the figures, delivered with Buzz Accounting so the numbers in front of you are current rather than remembered.
What to do this week
- Write down all six numbers as they stand today, even if some are estimates.
- Split revenue into your three or four main types of work and cost each one honestly.
- Calculate gross margin for each type. Expect a surprise, and expect it to be uncomfortable.
- Work out your debtor days and compare them with your stated terms.
- Build the one-page scorecard with last year’s comparatives.
- Book the same hour on the same date every month for the next six months.
- Set one target, for one number, for this quarter.
- Ask your accountant for a management accounts pack you can actually read, and say so plainly if you cannot read the current one.
Four questions to sit with
- Which of the six could you state right now, without looking?
- Out of ten, how confident are you reading your own management accounts — and who have you told?
- Which type of work do you suspect loses money, and why have you not costed it yet?
- If revenue fell 20 per cent for two quarters, at what point would you have to act?
The numbers do not run the business. They tell you what the business is actually doing, which is the prerequisite for running it well.
Once the six are familiar, the next step is using them to make decisions rather than reports — which pricing to change, which work to stop taking, which hire the margins will actually carry. That is the everyday content of Business Coaching, and Breakeven is the model that ties them together.
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Common questions
Do I really need to understand this if I have a good accountant?
Yes, because you are doing different jobs. Your accountant records what happened accurately and keeps you compliant; a good one will also explain anything you ask about. But they are not sitting in the room when you quote a job, decide whether to take on a difficult client or judge whether you can carry another salary — and those decisions are made from the numbers whether or not you have looked at them. You do not need to be able to prepare accounts. You need to read them well enough to ask a hard question and know when the answer does not add up.
How often should I look at the numbers?
Monthly for the scorecard, weekly for cash. One hour on the same date every month, comparing all six numbers with last year and with your target, is enough for almost every owner-managed business. Cash deserves a shorter loop: fifteen minutes each week updating the 13-week forecast with what actually happened. Anything more frequent than that becomes displacement activity, and anything less frequent means you find out about problems once they have already cost you money. The consistency matters far more than the sophistication — a simple scorecard done every month beats a detailed one done twice a year.
What is a good gross margin?
There is no universal figure, because a manufacturer, an agency and a construction firm have completely different cost structures, and comparing yourself with a published sector average usually tells you nothing useful. Two comparisons do work. The first is your own trend: is the margin on the same type of work better or worse than a year ago, and do you know why? The second is between your own job types, which is where the money usually hides — one category quietly running at a third of the margin of another, absorbing capacity that could go to better work. Fix that gap before worrying about the sector.
All six numbers look bad. Which do I fix first?
Cash first, always, because it decides whether you get the chance to fix anything else. Build the 13-week forecast and deal with any week that goes negative. Then gross margin, because it is usually the fastest to move and it improves cash as it improves: repricing one category of work or stopping the worst of it can show up within a quarter. Pipeline comes third, since it determines the next quarter rather than this one. Revenue and net profit are outcomes of the other four, so they are the last things to attack directly and the first things to improve once you have.
My bookkeeping is months behind. Where do I even get these numbers from?
Start with the ones you can get today rather than waiting for the records to be caught up. Cash position comes straight off the bank, debtor days off your list of unpaid sales invoices, and pipeline value is already in your head or your inbox — none of the three needs a set of accounts. Revenue and gross margin you can build for a single month by hand in an afternoon: total invoices raised, less the direct costs of delivering that specific work. Net profit is the only one of the six that genuinely needs the bookkeeping done. And if your figures are habitually months behind, that is the real problem and it is worth fixing first. Closing each month within ten working days changes what the numbers are for — from a record of history into something you can still act on.