To run a business well you 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 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.
Owners often leave the financial side to the accountant because the statements look opaque, and the bank balance becomes the only number they check.
Which six numbers should every owner know?
- Revenue. Total income before any costs. On its own it can mislead.
- 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 make sense.
- Net profit. What is left after all costs, including overheads.
- Cash position. What is in the bank now, and what is expected in and out over the next 13 weeks.
- 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.
Three of them look backwards and three look forwards. Revenue, gross margin and net profit tell you what happened. Cash, debtor days and pipeline tell you what is about to.
Why is revenue misleading on its own?
Revenue tells you how much work you did, not whether it paid. A business can grow revenue by a third, hire to deliver it, and end the year with less profit and less cash than it started with.
Pair revenue with margin. “We turned over £900,000 at a 34 per cent gross margin, and the fastest-growing part of that ran at 11 per cent” tells you where to act.
How do you work out gross margin by job rather than in total?
A total gross margin hides the detail. Split revenue into the three or four types of work you do, then put 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 properly, 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. Split three ways, almost half the capacity is being spent on the work that pays least.
The direct-cost line takes judgement: be strict about it, and if in doubt include the cost. 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 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, often the tax it has not paid yet.
Why does cash matter most in the short term?
Profitable businesses can run out of cash. 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. 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 releases cash without borrowing. The levers are: 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.
Why does pipeline matter?
Pipeline is the only one of the six that tells you about work you have not done yet. 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.
Count only live opportunities with a value, a probability and a date, reviewed every month with the dead ones taken out, because an inflated pipeline gives false reassurance.
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 gives the figure meaning: £62,000 of revenue means nothing until you know it was £71,000 last year.
- One hour, same date every month. Book it.
- Write one sentence per number. One line on why it moved. If you do not know why a number moved, find out.
- Pick one number to work on this quarter.
The free Wheel of Business gives you the structure if you would rather not build it from scratch. If the figures feel unfamiliar, Financial Coaching builds your confidence with them in regular sessions, delivered with Buzz Accounting.
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.
- Calculate gross margin for each type.
- 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 read, and say so plainly if you cannot read the current one.
Four questions to answer
- Which of the six could you state right now, without looking?
- Out of ten, how confident are you reading your own management accounts
- 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?
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 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 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 many owner-managed businesses. Cash deserves a shorter loop: fifteen minutes each week updating the 13-week forecast with what happened. Less often than that, you find out about problems after they have cost you money. Put both in the diary as recurring appointments, and write one line on each number explaining why it moved since the last review.
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, so a published sector average is of limited use. 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 often 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, 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 often 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 needs the bookkeeping done. If your figures are habitually months behind, fix that first. Closing each month within ten working days gives you figures you can still act on.