Firstly, my apologies if last week’s email was a bit of a mess. I made the schoolboy error of adding a link, which apparently broke the internet. I wouldn’t anyone to miss my pearls of wisdom (well, cubic zirconia of wisdom, if you prefer) so I’ll add a reminder from now one about viewing from the website when I add fancy things.
As you may have gathered, I spend a lot of time helping clients understand what their numbers are telling them about their business. For better or worse, at its core, business is a numbers game so you may as well try to understand the figures and use them to help you.
The single most important lesson I try to get over is this – those numbers you see in profit and loss accounts, balance sheets, etc. are historical. Even if you do understand them, they are telling you about stuff that happened back then. Important, definitely, but telling you about where you were, not where you are now or where you’re going.
What we should be doing is turning this on its head and measuring and reporting on those things that make the numbers what they are. That would be useful.
Here’s an example of what I mean. You’re that roofer I mentioned in an earlier post. Your sales last month were £10,000. You spent £6,000 on materials, so you made a gross profit of £4,000. That’s a gross margin of 40%. Your sales and gross margin are important numbers – if we were 21 year old management consultants, we might call them Key Performance Indicators (KPIs). If you set yourself targets for KPIs, you can easily see whether you’ve reached those targets.
That’s marvellous and laudable (and frankly unique in the roofing world) but really what you want to do is generate sales of £15,000 with that gross margin of 40%. Will measuring last month’s sales help you achieve that? No.
But, what if you knew how those sales were achieved? You knew that you had 15 requests for a quote; you quoted for 8 of those, and of those 8 you got the work in 4 cases, so a 50% win rate. Your average price was therefore £2,500.
There are at least four factors at play here influencing your sales – requests for quotes; quotes actually given; quotes won and average price. In your opinion, the biggest influence is quotes given – by not bothering with 50% of sales enquiries you are leaving a lot of money on the table. So why not set yourself a target of, say, 80% of requests to be quoted? Then measure that and report it. If you get there – 15 x 80% x 50% x £2,500 = £15,000.
My experience is that when a client really focuses on something like this, it changes. They figure out (actually, they really know already) why that 50% is 50% and not 80% and do what needs to be done to change it. In this case, that could be something as simple as setting aside an fixed time per week to ensure all requests are administered rather than just ignoring some.
These underlying things are also called KPIs, but in this case that stands for the more useful Key Predictive Indicators. They are things happening now, which directly predict the final numbers. Change these and you’ll change the future. Whatever the pressing issues are currently in your business, think about a) what are the major influences on that issue; b) what practical action could you take to change those influences and c) how could you measure and report to assess what impact your action is having?
Simple but massively powerful.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.