The “BIG” business lesson vital to EVERY entrepreneur’s ultimate success… from one of the most famous and successful US presidential election slogans ever.
Back in 1992 the first George Bush was considered unbeatable in the upcoming US presidential election against then-Arkansas Governor, Bill Clinton.
You see Bush had successfully prosecuted the first Gulf War and was miles ahead in the polls.
Clinton’s campaign strategist, James Carville, a smooth operator saw a weak link in the Bush armour.
Carville knew he couldn’t beat Bush on foreign policy (Bush had a 90% approval rating at the end of the war in 1991) so he found a soft spot… the economy.
He coined the phrase, “It’s the economy, stupid”.
Sharp, simple, to the point.And it really hit home by implying Bush hadn’t adequately addressed the economy (which was in recession) and the rest, as the saying goes, is history.
Clinton ran on economics and went on to win not only the election but the hearts and minds of America… and a certain comely White House intern.
But I digress.
The phrase has been used ever since whenever someone wants to instantly cut through the clutter and focus on an important issue.
It’s the deficit, stupid… It’s the corporation, stupid… It’s the voters, stupid… are examples.
So you want success in your business?
Well, it’s all about the numbers… or more appropriately KNOWING your numbers… yes…
“It’s the numbers, stupid”
Your success or failure largely rests on your ability to measure your business activities and results, and quantify your business growth.
In fact it’s so important, it’s one of the reasons why, for our Million Dollar Makeover and Centurion clients, we include access to our own program ‘KPI Dashboard Management Software’, a complete online KPI tracking system valued at $5,000 to help small and medium business owners track their progress and monitor results.
The purpose of this article is to both raise your awareness and give you some tools to use because as management guru, the late Peter Drucker, said, “If you can’t measure it, you can’t measure it.”
I recall reading that 28% of businesses fail due to problems with the financial structure of the company, including the keeping poor accounting records. That’s nearly one third going under due to ignorance of basics. Dan Kennedy would call this sloth.
The simple truth is that you don’t need an MBA, a commerce degree or an in-depth understanding of double-entry accounting to know which numbers are the most critical to the health of your business and deserve your attention.
It never ceases to surprise me how weak some relatively successful business owners are when it comes to their numbers… maybe they were scarred by long division in primary school, algebra in high school or a scary maths teacher somewhere along the way. Whatever the case, you do have to bite the bullet and KNOW YOUR NUMBERS.
Yep, it’s the numbers, stupid.
If you don’t understand your key financial metrics, you have no way of monitoring your business’s health. This opens up a whole can of worms; apart from the everyday chaos you risk fines for late BAS and/or taxes returns, overlooking expenses, and running into difficulties paying bills and employees, just to mention a few!
It is, therefore, essential to not only understand what each of these key metrics can tell you about the health of your business, but also to monitor how these metrics are performing on an ongoing basis. This will enable you to make better decisions, as well as plan for the future.
First, let’s drill down to a baseline understanding. Then we’ll link these to your overall business goals, growth and monitoring. Read the key terms in the box below…
The 6 key terms explained…
a “cumulative” document that lists your company’s assets and liabilities from the time you started your business. Purpose: gives you a quick snapshot on the financial strengths and weaknesses of your business.
lists your company’s income (revenues or sales), minus your company’s expenses. Purpose: shows you
the profit or loss over a given time frame.
Cash Flow Statement:
shows how much money came and went through the business for any period of time. Purpose: helps
you understand why you have the amount (lots or little!) of money you do in the bank.
how much money you have left after you have deducted the direct costs from the selling price of your product or service. Obviously the greater the difference between selling costs minus direct costs the better. Purpose: shows how much you need to have enough left over to pay your indirect costs or overhead (things like salaries, rent, advertising, telephone, and utilities) and still make money.
calculated by subtracting all the expenses in your business, including taxes, from your revenue (this term is interchangeable with net profit, net earnings, current earnings or the bottom line). Purpose: vital because it reveals how much money is left after accounting for business operations; a negative number means you are running at a loss.
stands for earnings before interest, taxes, depreciation and amortization and is a way to report your business’ earnings. Purpose: is a way to make profits look better in comparison to with net income (note it doesn’t take into account taxes and interest payments).
Read it? Great. Understood it? Hopefully a second yes.
This is key… Each of these numbers should be available to you for each month of the previous year as well as the total for last year. That way you can compare and track your results.
And no, in case you’re wondering I haven’t left “sales” off the list. Sales are the reason you’re in business so this figure is a given on the critical numbers list. It’s also a given you need to keep a close eye on your sales figures because any dip could be a warning sign of trouble.
On the flip side a spike in sales could indicate you’re doing something right and it’s far easier to determine why business is good at the time your company’s on a roll than trying to figure it out later. Also, a quick response allows you to determine what you need to keep doing to sustain growth.
KEY POINT: if you don’t track a key financial figures listed above, you don’t know how much is being spent and what can be trimmed, and as a result, you can’t lower overhead costs or expenses.
This leads us into your KPIs and goals. Many business owners confuse the two. Here are definitions to clear this up…
KPI is a metric or unit of measurement used to gauge the level of performance or how far you have come (e.g. cost per order, sales per quarter)
Goal is a target or objective linked to your business strategy (e.g. increase sales to $1m p/a, increase EBITA by 15%)
So your KPIs help you identify where you can improve productivity. Of course not every KPI is relevant to every business so you must select a metric centred on your company’s primary business operations (eg a call centre may measure number of calls handled every day or even hour; a manufacturer may gauge units produced per hour).
The next step is to set a target. You should set specific benchmarks for your employees to meet. Then set a specific date by which the necessary improvements must take place. Naturally meeting KPIs can be incentivised for staff but this depends on your business.
The strength of using KPIs is that they are based on legitimate data. They also drive action in a non-emotive way. Numbers do not lie and are very difficult to argue with!
With the above analytics in front of you, you can now measure how you manage your business’s growth. Questions will naturally arise from the numbers. With the data in front of you, you’ll know which of the following you need to focus on:
1) Increase the number of new customers
2) Reduce the number of customers that left
3) Increase the average transaction value with up-sells or price increases
4) Increase the number of times your existing customers do business transactions with you
The special bonus you will receive for all you work in calculating these numbers is that just by putting the focus on these metrics, you and your team will see them go up!
Your KPIs serve to action your overall business goals. It’s good practice to continue monitoring your KPI targets at regular intervals. If conditions change rapidly in your industry, you may need to revisit your goals quarterly.
If your business and market is stable an annual review may be all that is required. The key thing is that regular follow-ups help you spot areas of reduced productivity before the problems become critical. This provides flexibility so you can respond accordingly: you may want to allocate more resources to departments that are understaffed or provide additional training for struggling employees for example. Or at worst it may tell you you have to apply the swift sword and even let underperformers go.
So how do you action all of this? I rely on 5 key steps:
1. Decide your business goals (link your KPIs to your goals)
2. Use a visual key such as a flow chart. This allows you to map specific operations of your business and identify any processes/departments that need refinement
3. Set the KPI for each process
4. Tell staff involved about the KPI, what it means to the business and what will happen if it’s met or not met. They absolutely need to know how their role contributes to achieving the KPI
5. Review the KPIs to measure your success
Financial statements tell the story of your business and your future fortunes.
Understanding your critical financial numbers may not be as exciting as making a big sale, but keeping an eye on your numbers will give you peace of mind and help you make smart business decisions moving forward.
Remember: If you can’t measure it, you can’t manage it! Or as Bill Clinton’s man might say, “It’s the numbers, stupid!”.
And it’s one which is often overlooked when it comes to benchmarks and KPIs. And it involves you and your use of time.
Are you a victim to time vampires? Mike Murdoch, author of Secrets of the Richest Man Who Ever Lived wrote, “Few people around you have any serious plans they are pursuing on a daily basis.” And he’s dead right. Your employees turn up with a different agenda to you. So do you measure and most importantly GUARD your time?
You need to ruthlessly self-manage every aspect of your day… your time, your thinking, your roles, your focus and what new opportunities you select. If you don’t your productivity and therefore your result will be affected.
So my advice is to protect your time every day. Each of us only has 24 hours in a day. How well do you use yours? You may want to keep a diary for a week just to see where all those hours and minutes go. Because even when it comes to time… it’s the numbers, stupid!
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