The 3 Numbers Every Business Owner Must Track (Or Risk Flying Blind)

If you ask most entrepreneurs how their business is doing, you’ll often hear something like:

“Sales are up.”
“Things feel slower lately.”
“We had a rough month.”

But feelings aren’t management tools.

If you really want to understand how a business is performing—and whether it’s heading toward growth or trouble—you need to look at something far more reliable: your financial statements. https://youtu.be/9jpNizbGibk 

For centuries, accountants have refined a way to summarize everything happening inside a company into a few structured reports. When those reports are set up properly, they become more than paperwork for taxes—they become your business dashboard.

And at the core of that dashboard are three key performance areas every owner should monitor.

1. Gross Profit: Are You Actually Making Money on What You Sell?

The first and most important measurement comes from separating sales from cost of goods sold (COGS).

COGS represents the direct costs required to produce or deliver what you sell. Depending on the business, that might include:

• Raw materials
  
  

• Direct labor
  
  

• Production supplies
  
  

• Product-specific service costs
  
  

When you subtract these direct costs from your sales, you get gross profit.

Why does this matter?

Because it tells you whether your pricing and production costs are aligned.

Many business owners assume they’re making good margins simply because they price items higher than what they paid for them. But real life introduces complications—defects, rework, labor overruns, supplier price changes.

For example, imagine a cabinetry business quoting jobs with a target margin. If mistakes in production force workers to redo parts of the project, the extra labor quietly eats away at profits. The owner may think the job was profitable—until the numbers reveal otherwise.

Tracking gross profit ensures you know which products or services actually generate money—and which ones quietly drain it.

2. Operating Expenses: The Cost of Keeping the Lights On

Once you know you’re making money on each sale, the next question becomes:

How much does it cost to stay open?

Operating expenses (also called overhead) include costs that exist whether you sell one unit or a thousand.

These typically include:

• Office salaries
  
  

• Rent or property costs
  
  

• Utilities
  
  

• Insurance
  
  

• Software subscriptions
  
  

• Administrative expenses
  
  

These costs tend to creep upward slowly. An internet contract increases here. A new software tool appears there. Maybe a small service fee slips into the monthly expenses unnoticed.

Individually, they seem minor. But over time they compound.

By reviewing overhead expenses monthly, you can spot changes early and investigate why they’re happening. That small $200 increase might seem harmless—but multiply it across several categories and it starts to erode profitability.

Owners who watch these numbers closely can control expenses before they quietly reshape the financial structure of the business.

3. Financing Costs: The Hidden Drag on Profit

Even a well-run business can struggle if it’s financed poorly.

Interest payments, loan fees, and financing structures can create a heavy burden that drags down otherwise healthy operations.

For example, some companies rely on high-cost financing tools like merchant cash advances. While they provide quick access to capital, their effective interest rates can be extremely high.

The result?

You might run an efficient, profitable business on paper—yet still end the year with disappointing results because financing costs consumed the gains.

Separating these costs in your financial reports allows you to clearly see how strategic financial decisions affect your bottom line.

Why Most Business Owners Miss the Warning Signs

A surprising number of entrepreneurs treat financial statements as a once-a-year obligation for tax filing.

That’s a huge missed opportunity.

When financial reports are properly structured and reviewed regularly, they function like a report card for your business decisions. They reveal whether pricing changes worked, whether costs are creeping up, and whether financing decisions are helping or hurting the company.

Without this visibility, problems grow quietly.

At first it might just look like a slightly weaker month. Then a few more months pass. Eventually the business owner realizes profits have disappeared—and by then the hole is much deeper.

Fixing the problem becomes harder because now the business must not only recover profitability but also repair the financial damage caused along the way.

The Real Advantage of Tracking the Right Numbers

Business success rarely comes from guessing.

It comes from observing patterns, spotting shifts early, and adjusting quickly.

When you consistently monitor:

• Gross profit (are you making money on sales?)
  
  

• Operating expenses (are costs creeping up?)
  
  

• Financing costs (are strategic decisions draining profit?)
  
  

…you gain the ability to respond before small issues become big problems.

And that’s one of the biggest differences between businesses that steadily grow and those that slowly drift into trouble.

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The Subtle Red Flags of a Struggling Business (And the Smartest Way to Test a New One)

 Sometimes the biggest insights in business don’t come from spreadsheets or boardrooms—they come from observation.

Two thoughtful questions once sparked a conversation that led straight to the heart of how businesses fail… and how new ones can quietly prove themselves before risking too much.

Let’s unpack both sides of that coin. https://youtu.be/-QQyx_F4RTg 

Part 1: The Quiet Warning Signs a Business Is Running Out of Gas

When people think about diagnosing a troubled company, they imagine diving into financial statements, ratios, and forecasts.

But if you’re on the outside looking in, you rarely get access to those.

Fortunately, you don’t need them.

One of the clearest indicators of financial strain is something far more visible:

Deferred maintenance.

When a business stops fixing the little things, it’s often because it can’t afford to—or doesn’t want to admit it can’t.

Look for clues like:

• Burned-out lights that stay burned out
  
  

• Broken fixtures that linger for weeks
  
  

• Peeling paint, worn signage, or neglected cleanliness
  
  

• Equipment patched together instead of properly repaired
  
  

These aren’t just cosmetic issues. They’re evidence of cash preservation mode.

When money gets tight, owners delay anything that doesn’t immediately generate revenue. Unfortunately, those small compromises accumulate, slowly eroding customer experience—and often signaling deeper financial trouble beneath the surface.

In many cases, the condition of the premises tells you more than the balance sheet ever could.

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Part 2: The Simplest Way to Know If a New Business Idea Will Work

Now flip the perspective.

Instead of evaluating a struggling company, imagine you’re considering launching something new. The big question becomes:

How do you know whether the market actually wants what you plan to offer?

Many aspiring entrepreneurs fall into the trap of over-planning:

• Endless research
  
  

• Complex projections
  
  

• Expensive build-outs before the first customer appears
  
  

But there’s a far more practical approach.

Try to make a sale before you build the business.

Yes—sell first. Then build.

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A Smarter Kind of Market Research

Consider this strategy:

Before investing heavily in infrastructure, test demand using the smallest possible commitment:

• Run advertisements
  
  

• Set up a phone line or landing page
  
  

• Offer the service before fully developing it
  
  

• Even resell someone else’s product temporarily
  
  

If customers respond, you’ve validated demand.

If they don’t, you’ve saved yourself from building something nobody wanted.

This kind of real-world testing beats theoretical analysis every time. Markets don’t lie. Buyers either show up—or they don’t.

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Why This Approach Works So Well

Because it answers the only question that truly matters:

Will someone pay for this?

Not “Do people say they like the idea?”
Not “Does the spreadsheet suggest profitability?”
Not “Do friends think it’s clever?”

Actual demand is proven only when money changes hands.

By testing early, you shift risk away from capital investment and toward small, controlled experiments. That’s how experienced operators evaluate opportunities without betting the farm.

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The Big Lesson: Watch Behavior, Not Just Numbers

Whether you’re assessing an existing business or exploring a new venture, success leaves clues—and so does failure.

• Struggling businesses reveal themselves through neglect.
  
  

• Promising ideas prove themselves through early sales.
  
  

In both cases, reality speaks louder than theory.

If you train yourself to observe these signals, you’ll make better decisions than most people who rely solely on reports, assumptions, or gut feelings.

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Great interview with the host of Defenders of Business Value Ed Mysogland

 

There's a common belief that selling a business is the ultimate jackpot—a one-time windfall that guarantees wealth and success. But is that the reality?

In this episode I sit down with David C. Barnett, three-time best-selling author, entrepreneur, and former business broker, to unpack the realities behind buying and selling small and mid-sized businesses.

David's journey began in advertising sales before he launched multiple ventures, including a commercial debt brokerage. That path eventually led him into business brokerage and private transaction consulting, where he has spent more than a decade advising entrepreneurs around the world.

Drawing from his experience as the author of How to Sell My Own Business and seven other books, David challenges the common myths around exits. We discuss:

When Business Sale Proceeds Don’t Cover the Debt (What Happens Next?)

 

**New Video Alert!

In this episode, I walk through a very real scenario that buyers, sellers, and brokers are facing more often as parts of the economy slow down.

Imagine a business that once justified a higher valuation. 

Over time, revenues fall, earnings shrink, and the value declines — but the debt remains. 

On closing day, most of the purchase price must go toward paying off secured creditors. 

There may not be enough left to cover broker commissions, legal fees, or other transaction costs.

So what do you do? In this video, I explain. 

Watch the video here: https://youtu.be/4IAWsWGV4qM 

Cheers

See you over on YouTube

David C Barnett

Why Business Valuation Isn’t Like Real Estate (And Why That Matters More Than You Think)

 Every so often, someone asks a question that sounds simple on the surface—but actually reveals one of the biggest misunderstandings about buying and selling businesses: 

“How do I find comparable sales and apply the right multiple?” 

It’s a fair question. After all, that’s exactly how things work in real estate. If you’re selling a house, you look at similar homes nearby, compare features, adjust for differences, and arrive at a reasonable price. Clean. Logical. Familiar.

But businesses? They don’t play by those rules. https://youtu.be/ANKKqemYCTs 

The Temptation of the “Easy Comp”

Many buyers and owners assume there must be a neat list somewhere:

• A set of recent transactions
  
  

• A few tidy multiples
  
  

• A formula you can apply to get the answer
  
  

That assumption comes from how transparent property sales are. Home transactions are public. Databases are rich. Comparisons are visible.

Business sales live in a completely different world.

The Hidden Nature of Business Transactions

Unlike property deals, most business sales are private. There’s no universal registry showing what changed hands and for how much. No standardized reporting. No requirement that details be shared publicly.

What data does exist is often collected voluntarily—and that introduces another challenge.

When deal information gets entered into transaction databases, it depends heavily on how the financials were interpreted and adjusted by whoever handled the deal. If earnings were normalized incorrectly, that flawed number becomes part of the dataset. One small judgment call can distort what looks like a reliable comparison.

So while databases can be useful, they’re far from foolproof.

Multiples Aren’t Universal—They’re Contextual

Here’s another common misconception: people want the multiple for their industry.

There isn’t one.

Even within the same industry, multiples shift dramatically depending on:

• Size of the business
  
  

• Stability of earnings
  
  

• Customer concentration
  
  

• Management structure
  
  

• Growth trajectory
  
  

• Risk profile
  
  

A smaller company may sell for a vastly different multiple than a larger, more systemized one—even if both produce similar products or services.

Simply grabbing a number and multiplying it by cash flow can produce a wildly misleading valuation.

Data Is Only as Good as the Person Using It

Even when you gain access to legitimate transaction data, interpretation is everything.

You must:

1. Filter deals by comparable revenue size (not just industry).
   
   

2. Recognize outliers that don’t make economic sense.
   
   

3. Understand how deal structure affects reported value.
   
   

4. Adjust for working capital, assets, and risk differences.
   
   

Without that context, the data can point you in the wrong direction faster than having no data at all.

The Real Skill Isn’t Finding Numbers—It’s Understanding Deals

People often believe the hard part is getting access to databases. In reality, the hard part is learning how to think about acquisitions properly.

Experienced advisors don’t just pull comps—they interpret patterns, question anomalies, and translate raw information into practical insight.

Ironically, the money many people consider spending on expensive datasets is often better invested in learning how transactions actually work. Once you understand deal mechanics, you can evaluate opportunities yourself and bring smarter questions to the table.

A Smarter Approach for Buyers and Owners

If you’re trying to value a business or assess an acquisition, focus less on chasing a magic multiple and more on developing deal literacy:

• Learn how cash flow is truly calculated.
  
  

• Understand why normalization matters.
  
  

• Study how structure changes value.
  
  

• Use comparables as reference points—not answers.
  
  

When you build that foundation, you stop looking for shortcuts and start making informed decisions.

And that’s when the real opportunities become visible—while others are still searching for a formula that doesn’t exist.

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