Five numbers a founder should check every month

The first number is sales for the month. Sales means the value of goods or services you delivered and billed, excluding tax you collected for the government. It is the number everybody knows, and it is the starting point rather than the answer. Look at it against the same month last year if your business is seasonal, and against last month if it is not.

The second number is gross margin. Gross margin is what remains from sales after the direct cost of what you sold: the materials, the purchase cost of goods, the direct labour or commission that goes into delivering it. You can state it as an amount and as a percentage of sales. Here is a made-up illustration. If you sold 10 lakh rupees of goods in a month and the goods cost you 6 lakh rupees, your gross margin is 4 lakh rupees, or 40 per cent. If next month the cost of the same goods rises to 7 lakh and your prices do not change, the margin drops to 30 per cent, and a quarter of your gross profit has gone without sales moving at all. Falling margin is usually the first sign that costs have crept up, discounts have grown or the mix of what you sell has changed. Which costs count as direct is a decision to make with your accountant, and then to keep consistent.

The third number is net profit. Net profit is what is left after the direct costs and all the running costs: rent, salaries, electricity, transport, marketing, interest on loans and other overheads. Staying with the illustration, if the gross margin is 4 lakh rupees and the running costs are 3 lakh rupees, net profit is 1 lakh rupees, or 10 per cent of sales. The useful habit is to compare months. If sales grew and net profit did not, find out which cost grew faster.

The fourth number is the cash balance, with a companion: weeks of cover. Cash balance is the money you actually have in the bank and in hand today, not what customers owe you and not what the books say you earned. Weeks of cover is the cash balance divided by your weekly commitments, which are the bills that must be paid whatever happens, such as salaries, rent, instalments and supplier dues. In the same made-up illustration, with 3 lakh rupees of running costs and 6 lakh rupees of direct costs a month, you pay out roughly 9 lakh rupees a month, or a little over 2 lakh a week. A balance of 4.5 lakh rupees covers about two weeks, which you want to know before a bad month, not during it. A profitable business can still run short of cash, because stock must be bought, customers pay late and tax falls due on its own schedule. This is why profit and cash have to be watched separately.

The fifth number is overdue receivables: the money customers owe you that is past its due date. Make a simple list of every unpaid invoice, with the customer, the amount, the due date and how many days late it is. Add up the total, and also note how much of it is more than thirty days late, and more than sixty. Every rupee in that list is a sale you have made but cannot spend. If it grows month after month, the business is financing its customers, and your own supplier payments, salaries and loan instalments are being funded from somewhere else. If you supply to a larger buyer, remember that micro and small suppliers have legal protections on payment timelines; a chartered accountant or lawyer can tell you how they apply to you.

How do you get these numbers? You need three things: your sales records or invoices, your expense records and your bank statement. If your books are not up to date, that is the first problem to fix, and it is one this exercise will expose quickly. Set aside a fixed time each month, ideally within the first week, to update the figures in a simple spreadsheet with one row per month and one column per number.

What do you do with the numbers? Look for direction, not perfection. A single month tells you little. Three or four months in a row tell you a story. Ask the same questions each time. Did margin move? Did net profit follow sales? Did cash go up or down, and was that expected? Did receivables grow faster than sales? When a number moves in a way you did not expect, write the question down and find the answer, either from your own records or from your accountant.

There is no universal good figure. A healthy gross margin for a trading business can be very different from that of a service business, and seasonal businesses swing widely through the year. The benchmark that matters most is your own history, plus whatever your accountant or trade association can tell you about businesses like yours.

A caution to finish. These five numbers are a monitoring tool, not accounting or tax advice. They do not replace proper books, statutory filings or the advice of a chartered accountant. But an owner who looks at them every month will usually notice a problem weeks or months earlier than one who looks only when the tax return is due.