In this episode we will take a look at key figures and how they can help you in your financial management running your own business.

Working with key figures

Key figures are one of the concepts I at first did not understand at all and when the coin dropped, they became a central part of my work. Key figures are simple adjustment points that you select in order to be able to follow and make adjustments to your company's development over time and with greater accuracy than by only looking at the annual return. Key figures are often adjusted monthly, but you can choose other intervals too.

The main thing is that you need to choose a regular interval and then continuously take measurements for each adjustment. In this way, you will be able to learn to see variations over the year and see trends in your company's development, for example is it going steadily upwards or is it a temporary peak? Has it turned down financially without you noticing it because you are busy with other things and still get no time left over or give too many discounts so that even if you sell a lot you still get less results? The key figures are the entrepreneur’s beacons to navigate by.

Examples of key figures

Which key figures you choose depends on what you think is relevant to measure. This differs from business to business, depending on the type of product and industry. To give you a better idea, we will run through the example of a coaching business. You can use this example and apply this thinking to your own company, while keeping in mind the particularities of your product and industry.

Hourly rate, number of clients, hourly income, hourly cost

The usual key figures for consultants and coaches are chargeable time, meaning what percentage of your total working time is actually charged by an invoice. This is calculated easily by dividing the number of total hours worked per month by the number of hours you actually invoiced during the same period. Set a goal for how much it should be and regularly check if you meet it. Comparative figures can be, for example, ICF's global coaching study from 2015, where external coaches say that they spend 38% of their working time on actual coaching, which is usually the time you as a coach can invoice. This would mean that to reach the average, you must have 38% chargeable time.

Many choose other key figures such as the number of clients or hourly income. The latter is calculated by summing month by month what has been invoiced in total and then dividing it by the total number of hours worked. This will show you how much you actually bring into your company per hour. This is a useful exercise that will help you maintain your price levels. Your hourly wage is not the hourly rate you invoice but the hourly rate you have per hour worked.

The cost per hour worked is another indicator you can use for making adjustments to your financial planning, which some people think helps in decisions about long-term cost changes. It can help you answer questions such as “what difference does it make if I take the more expensive office?” You sum up your costs for the period and divide them by the number of hours worked.

Turnover, costs, and profit

Earnings and sales are two of the most common key figures used by entrepreneurs and freelancers. You probably know them best from all the other figures. Turnover is usually the equivalent of the total sales - all money that comes in your company. The profit is calculated by subtracting all the costs from the turnover.

Operating margin

The operating margin is a key figure that is often used when comparing different industries. It is also used to determine the change in profitability over time when new pricing, services and working methods are introduced. The easiest way to calculate your operating margin is by dividing the profit by sales. The resulting percentage is your operating margin. For example, if you have a profit of $1000 and a turnover of $10.000, you have an operating margin of 10%.

You choose which key figures you use, how often you look at them and what you use them for. They are your gauge points and the main rule is that they should be easy to understand and measure, and give you the information you need to be able to make the right financial decisions.

A few concluding words

As you can see, we have not talked about accounting here at all - because that is a different thing. Accounting is the practical presentation of the company's figures. Financial management is on another level. This is where you make the financial decisions about what to do with those incomes and expenses that your accounting shows. See it as the two different tasks they are. Many choose to hire an accountant. That can be wise. However, financial management is part of the management of the company. That's your job as a freelancer or entrepreneur. It's worth learning, perfecting, and keeping under your control.

See it as looking in your wallet before you shop. In good times, it is wise to calculate how much you can spend without having too much of the month left until you get your salary. In tough times, it is good to know that the money in your wallet is enough for what you now pick up before you stand at the checkout and have to pay. In the same way, financial management is your way of taking control of the cash flow in your company. Control it wisely and it will make your freelancer or entrepreneur experience more fun.