Good business doesn’t just happen. Good business is on purpose, by design and built according to best practice.
There are rules of play that we need to know and follow with discipline, intention and competence if we want to last as business owners. And this is never more true than when it comes to the key numbers – which include but are not limited to – the money.
I can’t tell you how often I hear business owners say (particularly those who have started up off the back of their talent-fuelled passion, which is most of us!) that they “don’t like” or “aren’t good” at the numbers or collecting the money. The reality is that just a love of our craft (be that as a baker, or a photographer, or an accountant or a manufacturer) isn’t enough. We cannot continue without knowing our numbers and managing our debt, or simply abdicate these roles to someone else and stay “out of it”.
These key numbers are critical, because they tell us whether we have enough or not, and hopefully in enough time that we can take remedial action at regular daily, weekly, monthly, quarterly and annual intervals in the life-cycle of our business. If we don’t watch them like a hawk, consistently and competently, we run the risk of being dead in the water before we know it.
Think of money as the bloodline to the very heart of what we do, and the key numbers as the report card on how we’re doing to safeguard our blood supply.
And if we don’t know or don’t like or aren’t good at these numbers, the good news is we can learn, we can improve and we can do better. We can take back where we have abdicated this responsibility and recognise our job is to set up our business so that it brings in enough money, plus know our key numbers along the way so that we can gauge whether the business is on track or not.
So, what numbers matter?
A basic business dashboard is made up of a mix of key numbers, the first of which relate to the money directly and the balance to marketing and sales – which drive turnover. Good business knows, plans for, collects monthly data on and reviews regularly against a budgeted number for the following:
Also known as revenue or income, this figure is largely made up of sales (new and repeat), but can also include other sources of income to the business, like the sale of assets or interest or rental of business space.
■ Number of sales
This is the total number of concluded transactions that contributed to or made up the turnover. They can be analysed against daily, weekly, monthly, quarterly and annual targets and also for their profitability. Not all sales are equal and not all big sales are necessarily the most profitable. The holy grail in sales is those with the biggest profit margin that are also easy to transact consistently and the volume of which is easily scalable.
This can be divided into two key numbers in most businesses: Firstly the costs that relate directly to actually making a sale known as the Cost of Sales; and then ordinary expenses that can be a fixed or variable monthly amount that in either event are incurred, whether we make a sale or not.
Please intentionally budget for this every month to keep your brain focused on more than just breakeven. In panicking about bad debts and just keeping our heads above water, we often set up the law of attraction to deliver us both debt and a just-over-broke reality. Our mental focus needs to be oriented towards making a profit, so that we can employ our subconscious on helping us achieve just that.
Every business needs to know at what specific point in the day, week or month the sales momentum actually covers all the costs.
■ Debtors and Creditors
Cash is King is a wise, old, true saying. Without it, we lose the business game even if we are selling profitably on paper and have a healthy ROI (ask your accountant if this is Greek). At all times we need to be clear which clients owe us, how much and over what time frame – our debtors. And we need know who we owe, including SARS, and by when – our creditors. Together this creates the basis of our cash flow monitoring that keeps us in the game.
Some tips around good cash flow include:
• Don’t increase your sales or marketing until you have gotten good at getting in the money on time, else you will just grow yourself out of business.
• Ensure your payment terms to your customers match your payment terms with your suppliers, so that your suppliers – and not you – are effectively funding the cash gap.
• Pay yourself first. If you run out of money to pay your team or suppliers, at least you will still be motivated enough to galvanise your sales actions.
• Manage (don’t endure) debt. Have a debt process that includes a phone call or face-to-face early and often. People who owe you tend to ghost you, so stipulate how payment works upfront before starting to do business together – then STICK TO IT and call them on it.
• STOP doing business with those who can’t, won’t or don’t pay until they do.
• Keep residual cash in an interest-bearing account and have a debit order on the current account to put savings away monthly.
• Set aside a monthly contribution to annual bonuses, tax and annual provisional tax in a separate account so you don’t spend it.
• Immediately as the money comes into the current account, siphon off 15% if you’re VAT registered, and hold it in the interest bearing account so you don’t spend it either.
• Immediately call, or even better, go and see any supplier you can’t pay and ask them to “ring fence” the debt as non-interest bearing and arrange a re-payment plan over as many months as you can negotiate. This will help make your monthly obligation bearable by breaking it down to a smaller number, allow you to “sell” enough to include this cost and frighten you less!
• Review all costs at least bi-annually, staff performance at least tri-annually, supplier performance annually and marketing efforts monthly to see whether they are yielding a return or not, and then remediate without delay.
■ Your salary
Please don’t think you are being smart if you make this as little as possible to “save tax”. This is short term thinking. Your salary needs to be market-related and on it you need to pay the tax, even if you don’t “take” it out of the business because there isn’t cash flow. Untaken salary can remain on the books owing to you on your member’s loan account (and if this is Greek, do speak to your accountant!) but it is critical to have this properly reflected to calculate real profitability and to enable you to qualify for a bond or credit facilities when needed.
■ Numbers of leads
These are contacts that come into the business in response to your marketing strategies and efforts – both inbound (you did little to generate them) and outbound (you did some hard work to drum them up).
■ Conversion rate
This is a percentage calculation of the numbers of leads that convert to sales. I do appreciate that this month’s leads are not this month’s sales, but the percentage calculation done every month will yield a trajectory that over time is a valuable indicator of your business’ sales ability and whether it needs help OR whether your marketing is yielding the right or wrong type of leads. So, measure it and if you have a sales team, have a conversion rate for each of them.
■ Average Rand Sale (ARS)
This key number is calculated by dividing your monthly turnover by the number of customer invoices raised in that month. It represents a measure that is directly impacted by any and all upsell efforts. The aim is to improve this ongoingly – it is the cheapest way of growing revenue.
■ Customer or Lead Acquisition Cost
This is derived by dividing your marketing spend by the number of leads or customers you acquired in the month you made the spend. It is an enlightening number to know and manage, as so often marketing seems to be “money down an endless black hole”. Once you know what it is you can aim to improve it.
Ask your accountant what yours is – it will tell you whether staying in business year on year is worth it or not!
To know these numbers, you will need to have an Accountant on board OR an accounting software package that can deliver you a balance sheet, a profit and loss statement (preferably in comparison to a monthly and year-to-date budget), a debtors’ age analysis, a cash flow report and a bank statement each month. You will need to ensure that someone responsible and able captures what is needed, so that inputs are sensible and useable. Rubbish in, rubbish out – so don’t go cheap on this resource and think you’ll save money! Once you have these documents, you can calculate your conversion rate, your acquisition cost, your ARS, your breakeven and your ROI.
Once you know these numbers, you can set targets and review progress towards these consistently and with the team. You can set strategies for improvement and rate your success on these. You can accurately determine what problems need solving so that your effort goes into the right places – and I guarantee you will be pleasantly surprised at how much good this does.
Once you “take back control” of the money and the numbers, you will be amazed at how quickly you can understand where to find these on your financials reports, how to read and make sense of them. And lastly, you will be able to save resources and take heart by watching how your improvement efforts affect these numbers and what impact taking action in response to them has on the business – and that is GOOD BUSINESS. If any of this eludes you, get help.
By Kathi Clarke, a registered industrial psychologist and an internationally-accredited business coach with ActionCOACH. Visit: www.kathiclarke.actioncoach.com