Why You Need to Know Your Numbers

You wouldn’t buy a house or car without knowing what your monthly payment is, right?

Obviously, knowing all aspects of your numbers is crucial.

The same is true for buying businesses.

When you can pick apart and dissect a business's financials, you have the upper hand during a negotiation. What’s more, you can also detect red flags early on in your due diligence process.

The truth is numbers don’t lie. The more you understand the numbers, the more leverage you have as an investor, and the more profit you can make from your acquisitions.

There are 7 key metrics you need to know before buying a business:

1. Annual Revenue

Annual revenue is the total amount of money a business generates before expenses are taken out in a given year. Alone, this number doesn’t provide much insight into the company’s performance, unless you look at it over time and measure its overall growth.

2. Annual Expenses

A company’s yearly expenses include all the money spent on costs or equipment. This number is typically broken down into two categories: direct and indirect costs. Direct costs are all the money spent to make a product or deliver a service, like materials or labor. Indirect costs are general expenses that keep the business running, like rent, utilities, and office supplies.

3. Net Income

Net income equals revenue minus expenses. This is a key number to know because it shows what the business is actually making in profit.

4. Debt-to-Equity Ratio

The debt-to-equity ratio tells you how much leverage a company is using. The higher the ratio, the higher the risk. You can calculate this ratio by dividing the total liabilities by the total equity.

5. Sales Price

Now that you have more context of how the business is currently operating, you can return to the sales price and determine if it’s a reasonable offer.

Do the numbers match up? Is the business actually profitable? Are there clear ways you can cut costs or increase revenue when you purchase, and is this factored into the price?

6. Return on Investment

Your return on investment is how much money you’ll make after buying the company. The higher the return on investment (ROI), the better deal it is for you.

7. Cost Savings Initiatives

These are areas of the business where you can cut down on costs. Think of it like rearranging the furniture in your house. You’re creating more space, making it more efficient, and helping drive a higher ROI.

Analyzing a business's financials is like a doctor giving you a checkup. The better you know your numbers, the clearer decisions you can make. While there are several other metrics that should be considered, these are 7 key metrics that you need to know.

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