Many micro and small businesses do not fail because they lack effort — they fail because they don’t understand their numbers. In a recent article we had discussed how Africans can bridge the gap between our usually huge ambitions and our realities, not through short cuts or fantasies, but laying out practical means through which Africans can transition from being employees or self employed to business ownership. In previous articles we had also shared micro and small business nuggets to help African micro and small business owners manage their businesses profitably and position them for growth. However, from our interactions with several micro and small business owners, as well as the conversations we observe online, it became evident that we needed to delve into some important numbers that business owners ought to know, numbers upon which they can build every other layer of knowledge.
One of the key points we highlighted in our article on bridging ambition and reality is that as you buy stocks in companies (invest in companies) on your journey to business ownership, you should take out time to study their financial statements to understand them. By doing so, you begin to understand how businesses truly operate, how they make money, and how they invest money. That understanding becomes useful when you eventually transition into your own business, providing you the platform to know and own your numbers, understand how they interact, and more importantly, what levers to pull to improve each one of them.
As Warren Buffett once said, "I am a better investor because I am a businessman, and a better businessman because I am an investor".
So starting by first owning small pieces of big businesses through stock investment can serve as a masterclass in building your business acumen before owning your own business.
What then are some of the important numbers to know as a micro or small business owner, and why do they matter?
Revenue
Revenue is the total money brought into the business from sales before any expenses are deducted. Simply put, how much did your business sell within a specific period? Do you know what levers to pull within your business to improve your sales and make it sustainable?
It is important, however, not to mistake revenue for success. High revenue with even higher expenses is simply a faster route to bankruptcy. Revenue tells you how much is coming in, but it does not tell you how much you are keeping.
Gross profit Margin
Gross profit margin is your revenue minus the direct Cost of Goods Sold (COGS), expressed as a percentage of revenue. It reveals the raw efficiency of your product or service before overhead costs come into play.
A low gross margin may mean you are pricing your offerings too low, or your production costs are too high, or simply that the industry you operate in naturally has tight margins. Some industries thrive on high turnover rather than high margins, but even within such industries, discipline is required.
However, take note of Warren Buffett's advice in this regard, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact". It is always safer to operate within a business that has sound underlying economics, including healthy margins.
Net Profit
Net profit is the percentage of your revenue left over after subtracting all expenses, including operating costs, taxes, interest on loans, and Cost of goods sold. This is the ultimate scorecard of your business's true financial health and efficiency.
It sits beneath your gross profit margin, which is why strong gross margins are important. They give you room to absorb operating expenses and still retain meaningful profit as your business becomes more efficient.
It is also important to compare your net profit margin with industry benchmarks. That is how you determine whether you are truly running a disciplined operation or simply surviving. When we talked about knowing the difference between your capital, revenue, and profit in our article on "Reinvest or Stagnate", this is the profit we were referring to.
Net Cash flow
Net cash flow is the difference between money flowing into your business and money flowing out of it. This is where many businesses struggle, even when they appear profitable on paper.
A business can be profitable on paper but still go bankrupt if cash is trapped in unpaid invoices when bills come due. We have written about this in a previous article. A business can record ₦10 million in sales and still struggle to pay suppliers because most of that money is locked in unpaid customer invoices. You want to ensure that your Cash flow is net positive, meaning that at any given point in time, the money coming into your business exceeds the money going out.
This is what allows you to meet your obligations without constantly being under pressure or cash-strapped. It is advisable to track this weekly, not just monthly, especially in the early stages of your business.
Fixed Costs
Fixed costs are expenses that remain constant regardless of how much you sell. These include rent, insurance, salaries, subscriptions. They represent your baseline cost of keeping your business running — keeping the lights on every month.
In the early stages of a business, it is wise to keep fixed costs as low as possible. This gives you flexibility and reduces pressure when sales fluctuate. Do not be quick to add to your fixed costs. There is also value in continuously asking how to optimize these costs. Can you extract more value from what you are already paying for? Can existing resources support additional revenue streams without increasing cost?
Variable Costs
Variable costs are expenses that fluctuate in direct proportion to your sales volume. These include raw materials, packaging, logistics, and transaction fees. They determine the cost of delivering one additional unit of your product or service.
Managing variable costs effectively improves your margins on every sale. Even small efficiencies here can compound over time, especially as your sales volume grows.
Breakeven point
Your breakeven point is the level of sales at which your total revenue equals your total costs. At this point, you are neither making a profit nor a loss.
This number is important because it defines your survival baseline. It tells you the minimum level of sales required to keep your business afloat. Once you know this number, you can translate it into daily, weekly, or monthly targets that guide your operations.
Burn Rate and Runway
Burn rate refers to how much cash your business is losing on a monthly basis when expenses exceed income. Runway, on the other hand, tells you how long your current cash reserves can sustain the business at that burn rate.
It provides a very clear and often uncomfortable timeline. If your business is not yet profitable, this number becomes your countdown clock. It tells you how long you have to either fix your operations, grow your revenue, or secure additional funding.
For instance, if you have a certain amount of cash in the bank and you are losing a fixed amount monthly, your runway is simply how many months that cash can last under current conditions.
There are several other numbers that may become relevant as your business grows in complexity, but these ones form the foundation. They are not just accounting figures; they are signals. They tell you what is working, what is not, and where your attention is required.
In addition to these numbers, you also need to keep a close eye on your inventory, especially for a product-focused business, ensuring that it is properly tracked, efficiently turned over, and not quietly tying down your cash. Alongside this, regular financial health checks of your business are necessary to identify leakages early, before they compound into larger problems.
Ultimately, the difference between a business that thrives and one that struggles is often not effort, but clarity. And clarity, in business, is built on numbers that are known, understood, and consistently tracked. In business, what you don’t measure will eventually control you.
Wishing you all the best in your business. Feel free to share this article within your network.
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