THE STORY OF YOUR NUMBERS TELLS YOU THREE IMPORTANT THINGSOct 07, 2020
One thing I loved to do more than anything was to help business owners grasp the power of the story of their numbers. I’ll tell you a story about this later. But the reason I started this company is that I learned over the years a much better way for business owners to not only get to the next level, but actually get their lives back.
Nearly all business owners know the language of their trade. The owner of a jewelry store knows jewelry and retail sales. A home builder knows construction. A heating and air contractor knows how to install and repair HVAC systems. A metal worker knows how to work magic with metal. And if they’ve been in business for long, they know something about sales and marketing – everyone knows they need to sell more. Has anyone ever heard the saying, “Sell more and spend less?” Kind of makes owning a business sound easy, doesn’t it?
But what many business owners don’t understand is the language of numbers. And they have no idea what they’re missing. Properly organized numbers should tell the story of your business giving clarity and inspiration to your entire team. If you have loftier aspirations to change the world, that’s great. But didn’t most of us go into business to make money?
So many business owners I’ve met they make their salary and there business shows a profit – but that profit isn’t in the bank. Let’s say they’ve been in business for 10 years and their average profit is $100,000/year – there have been no distributions. That’s $1,000,000 – and the company isn’t discounting their bills and is sometimes late. If they’re seasonal, they may even be tight making payroll at times.
The story of your numbers tells you 3 things.
1. The prize – the true profit potential of your business.
2. Simple and specific actionable details to make more informed decisions.
3. Focus. What business challenge needs to be focused upon RIGHT NOW, to move and grow vs going after all the opportunities at once. (Get this wrong, and you’ll frustrate yourself and your employees. Get it right, and you’ll all be cheering!)
#1 The Prize – The True Profit Potential of Your Business– The first exercise we do is to determine how much profit the company can make with a modest increase in sales. A few hours of digging is usually required to truly understand the company’s revenues, variable and fixes costs, and the constraints and problems in the business.
There’s one super-simple exercise that illustrates just part of uncovering the profit potential of any business.
Materials $800,000 40%
Labor $400,000 20%
COGS $1,200,000 60%
Gross Profit $800,000 40%
Net Profit $120,000 6%
What do you think the profits would increase if the revenues increased by $200,000 and no conditions changed. How many do you think would answer $12,000?
How many do you think would answer $80,000? An $80,000 increase sounds really good for only a 10% increase doesn’t it? I mean, if I knew all I had to do is increase my sales by 10% and I could increase my profits from $120,000 to $200,000, I’d be pretty fired up. Wouldn’t you?
But what if I told you the number was actually $40,000 higher? Even in this hypothetical case? (which it really isn’t. This actually is following a real example pretty closely as you’ll see in a few minutes.) You see, most production operations have untapped capacity. Every operation is different, but most I’ve seen the workers do what’s scheduled. When there’s less work, they don’t want to run out of work so they slow down. When there’s more work, they speed up. It’s human nature. We all do it. Most people think labor is automatically a variable expense. But it’s really not, especially for smaller businesses.
The $80,000 figure is based on the labor number being variable. But if the labor is fixed, the profit improvement isn’t $80,000, it’s $120,000 – or double the previous year’s profit. $240,000 is more than this company has ever made in its 30 year history. As of this telling, it’s April 12 2020 dead in the middle of the coronavirus crisis. More later on the actual story. That additional $120,000/year in profit the company could have $600,000 additional cash over 5 years and with a 4x multiplier increase in value by $480,000. And keep in mind that’s ONLY a 10% increase in sales in one year and then no increase after that.
Now, if you don’t know the answer to these questions for your business, don’t be embarrassed. This information or applied knowledge is virtually impossible to come by. My son has a business degree from The University of South Carolina. I have his Financial Management textbook sitting on my shelf – I keep it just as a reminder – it’s 3 inches thick. And his Accounting text book is about the same. One more thing, I have a book on my shelf “Financial Management for Non-Financial Managers” and the table of contents is 5 pages. I may have to pick a different title, but when I finish mine, it’s going to be a workbook you can download for free.
In this actual case, the previous several weeks were actually following a $40,000 pace pretty closely. The managers agreed in our first meeting that $45,000/week was achievable, which would have meant an increase of $260,000 annually. Within 2 weeks they were actually at $60,000. Now hopefully some of you are thinking, “Yeah, but won’t you run out of work?” That is great thinking actually. That’s how it works in real life. You find the constraint, you fix it, and it moves someplace else. Then you fix that. It moves again, and you fix that and so it goes. It could move from stage to stage in production. It could move to sales, possibly to cash flow(finance) and then back to production.
#2 – Simple and specific actionable details about the company’s performance.
There is a simple easy practice you can set up today requiring no special skills, software or expertise that will absolutely transform your business. What’s not as easy once you have the data, is getting to the “why” of your numbers.
For years, consultants and professional managers have been focusing on monthly financial statements to measure performance and conduct variance analysis. Timely and accurate financial statements are easier for some businesses, and for others are extremely difficult. Proper accounting requires time, expertise and good habits. If your accounting gets messed up, it can be very difficult and also costly to fix.
If you do have accurate financial statements by the 15th of each month, there are certainly ways they can be used for effective decision making and improving performance. If accurate, the balance sheet can be used to measure the company’s financial position. With a well-constructed budget, the Profit and Loss statement can be used to compare performance with budget targets. If the company doesn’t have timely and accurate financial statements or a budget, it’s a good objective to work toward. But keep in mind, you’re looking at information that’s over two weeks old.
The world moves much faster than that. There’s a much easier and more effective way to make progress. That way is weekly metrics. We have a spreadsheet tool you can use, but you really don’t even need that. You can do it on ledger paper, on a white board, on notebook paper. But do it.
Let’s start with sales. The best way to get this point across is to use an example.
A shed builder has two sales lots, Lot A and Lot B. The first step is to track how many visits to each lot there are each week. They can simply have a binder with tick marks on it and report those to the office. It would be nice to have a CRM system, but if you don’t have one, notebook paper is a good start.
How about how many customers they quoted.
How many units were sold.
Dollar amount of units sold
# of Units produced – built on site.
# of Units produced – shop built.
# of Units produced – total.
$ produced built on site
$ produced shop built.
$ produced total
Backlog – $ value of units sold but not yet produced.
Cash in bank
A/P Including Credit Card Balances
These titles go on the left side of the page. Along the top go the weeks. With what you have available, try to go back and collect the data from the last 4 weeks. Estimates will be helpful if you don’t have actuals.
#3 – Focus. What are the one to three things to focus on RIGHT NOW?
With the weekly metrics, your management team will then know what they need to focus on. If you have increasing backlog, why? What’s causing the backlog to increase? Where is the constraint within production. Break the production into stages. Where’s the constraint? Where are things slowing down? Leaders often waste resources and aggravate employees by focusing on non-bottleneck areas. Line workers often know where the problems lie if you ask them.