The world lives and dies by numbers. Granted I am an engineer by education so I may be a little bias…
Even more importantly, the world gets answers to questions by the correct numbers. If you’re looking at the wrong numbers, you’re never getting answers to your questions. Let me give you a quick analogy. In the world of internal combustion engine building we’re all looking for a few major numbers – namely horsepower and torque. So we hook an engine up to a dynamometer (a device that measures the power output of an engine) and now we know the horsepower and torque numbers. So what? How do I improve those? Well to do that you have to look at a lot of other numbers such as bore and stroke, number of cylinders, 2 or 4-strokes per cycle, manifold pressure, air-to-fuel ratios, cam lift and duration, ignition timing… And the list goes on and on and on… Without knowing how that engine is currently configured, I can’t possibly tell you what to “fix” to help it make more power.
Your business has 3 “big” numbers, they are # of customers, revenue and profit. Those are your horsepower and torque. All they tell you is where you’re at right at this moment. They don’t tell me how we got there or how we’re going to make more power (profit) the next time around. Even if you don’t know a single thing about engines, I’m hoping that analogy makes sense. The bottom line is, you have to know your numbers and they have to be the CORRECT numbers.
Let’s break your numbers down into a few basic categories (you’ll notice these are the same as I reference when talking about the 3 leaders every business needs):
Finance/Accounting – These are the numbers you get from your bookkeeper.
- Profit & Loss
- Balance Sheet
- Current Receivables (along with the aging)
- Current Payables (along with the aging)
- Cash in the bank
These are the numbers that provide questions, but no answers. Your bookkeeper only knows enough to start asking a few questions. Things like,
- “I see you spent $40,000 last year on marketing, what was your return on that?”
- “Your cell phone bills average $115/person, have you shopped around for a cheaper plan?”
- “You have $6,000/year in Meals & Entertainment, is that necessary or can that be cut back?”
- “It appears that sales are down 20% but costs are only down 10%, why is that?”
- “15% of your receivables are more than 60 days past due, what are you doing to collect money?”
As you can see, none of the reports under Finance/Accounting provide any answers except maybe to the question, “Do we have enough money to cover next payroll?” That doesn’t mean we don’t look at these numbers because this is where we measure the results. If we add a turbocharger to an engine, ultimately we want to see that reflected in higher horsepower and torque. The same is true for your business.
To start answering the questions about why your business has less customers, less revenues, and less profits, you need to use Brad Sugar’s business chassis. Buy his book Instant Cashflow, learn the chassis, and use it. You can also learn about the business chassis on Brad’s blog.
Sales/Marketing – Now we’re getting into the fun stuff. Here’s a quick list of the numbers you should know in this realm:
- Number of New Leads (daily or weekly, though some establishments will even look at this by the hour of day)
- Conversion Rate (i.e. the % of leads who become customers)
- Number of New Customers (how many people have bought from you?)
- Average Dollar Sale (revenue/total # of transactions)
- Average # of Times a Customer Purchases from you Each Year (total # of transactions/total number of customers)
- Cost per Lead (for each marketing project)
- Cost per Sale (for each marketing project)
Do you see where we’re going with this? If our sales are down, now I can pinpoint if it’s because we’re getting less leads, converting less leads to customers, selling a lower dollar amount per transaction, and/or because our customers aren’t coming back as often. Now we’re getting somewhere! With these numbers you’ll even be able to pinpoint that you’re getting less leads because that radio ad you started 6 months ago is no longer making the phone ring. In the next few blogs, when I get to the step about Improving Marketing and Sales, we’ll look at specific ways to improve each of the numbers above.
Service/Operations – This is your back-end. Once you’ve sold a product, this is how you deliver it, service it, restock inventory, order more inventory, schedule service, and everything else that’s in essence “behind the scenes”. The important numbers for Service/Operations can vary quite a bit from industry to industry however the concepts are the same so make the proper adjustments for your industry.
- Profit per income generating person – this could be per plumber, electrician, waitress, sales associate, barista or anything else. If a person on your team has the ability to generate income, you need to know this number.
- Income per income generating person – this is important because often these individuals have more control over the income they generate than the costs they incur. That doesn’t mean their choices don’t affect the costs of the business, I’m just saying that a plumber can’t much affect the cost of gas or the distance to his job or the markup for parts or the hourly rate.
- Turn-over – how long does it take between buying something for inventory and selling it. Car dealerships look at “average days on lot”, retail stores look at “average day on shelves”, service-based businesses might look at “number of days from inquiry to finished service.”
- Profit-margins – In other words, the mark-up of each product or service. If you’re a service-based business you need to determine the cost/hour for your billable people to determine your profit-margins.
- Customer Complaints – You might be surprised how close your customer complaints as a % of customers served mimics your net profits.
- Uncompleted Work – For retail or restaurant style businesses you don’t really have an equivalent for this. People walk into your business, they buy something, you provide it immediately, and your work is done. For service-based businesses, however, this information is crucial. If work isn’t getting done, or you’re getting behind, or customers aren’t being notified of delays, you’re going to have problems. You need to know how many outstanding work orders, quotes, and return phone calls are out there so they don’t ever slip through the cracks.
- Free Work – This means you screwed up an order and gave someone a free meal, or a free hour of labor, or a free part, or a free legal consultation, or you had to go back to their home or business to fix a problem you didn’t fix the first time. You screwed up and had to make amends and the cheapest way to do so was to do it for free.
- Daily, Weekly, and Monthly Break-Even – In other words, do you know exactly how much you need to sell today, this week, and this month to break-even. Some businesses will even break this down to per shift if there are multiple shifts within a day.
- Lost Customers – Since my blogs have talked quite a bit about recurring revenue, you need to have a very close watch over your recurring revenue customers. If one of them calls to cancel services, you better have someone trained to try and save that account. This is almost impossible to track if you have a retail style business.
Those are your numbers. Obviously there can be more, however those are the most universal and the ones I’d look at for just about every business from a law firm to a candy store to a hospital.
To your “number-knowing” success, Bryan
P.S. If you’re wondering how you track all of these numbers, the simple answer is with industry-specific software. If you don’t have any, make it a priority to purchase or lease some right away.