Article contributed by Sandy Geyer.
Q: What does the zero say to the eight? A: Nice belt!
This mathematics joke appealed to my humour but sadly was about all I understood of the subject at school. Accounting and Statistics at university nearly undid me completely. Not only was the theory behind these subjects seemingly beyond my grasp, I just didn’t see their relevance to anything in the real world.
The realisation, early in our first business venture, that it was the numbers behind our various systems and structures that were my most reliable source of information therefore came as somewhat of a surprise.
Let me explain. In our businesses, as entrepreneurs we do not have a tried and tested instruction manual, unless we have bought a franchise, and even then things change rapidly. At every crossroad there are so many pathways we could follow, that just exploring them all would be immensely time-consuming. Also, we might find ourselves surrounded by qualified opinions (if we are lucky) that -although well meaning – often just lead to further loss of focus.
As overwhelming as the options for our business might be, we still need to make effective decisions at some point and it is therefore really essential to always have as clear a view of our business as possible.
If a clear roadmap is not always possible then simple road signs need to suffice and in my experience we can find these in our numbers.
The “numbers” I refer to most often involve a relationship to one another. For example:
• How many products sold over specific time periods and/or seasons
• How many products sold per sales staff, per area
• How long it takes to retrieve payments,
• How much distribution cost is relative to volumes,
• How much cost of sale translates to at worst case scenario
The list goes on and on but it’s important not to become overwhelmed by the possibilities – we just need to apply this theory, in question form, to our own business.
We don’t need to and can’t possibly know everything about every aspect of our business but we do need to have a firm hand on those key areas of our business that indicate our progress in the most accurate form.
Let me be clear, we can’t pass this buck, not even to a CFO and we won’t find these indicators in our completed annual accounts. They might be there in some form but exploring them once the time has passed is much like navigating a vehicle moving forward whilst looking out the back window. A frightening thought, and I am sure many will agree, one that stirs an emotion much like the one we may often feel as business owners whilst navigating our businesses.
There is an EnQ tool called the Business Focus Plan designed to build an effective numbers-tracking technique for business owners and I would like to share the basics of it with you.
The steps are:
1) Start by identifying the key areas of your business. By key areas I mean any aspect of the business that is involved with the money flow i.e. it takes money out of the business or puts money in. Examples of key areas include, sales, fixed costs, cost of sale, commissions and distribution costs. It’s best to stick to key areas that represent an area of money flow that is significant enough to noticeably affect your bottom line if it is not performing to expectation or necessity.
2) Each key area will have a “bottom line” indicator, which will be a number or a percentage attached to the key area. The bottom line indicator is the (EnQ) close cousin of the key performance indicator but only qualifies in this instance if it directly affects your bottom line.
The point of this message is to encourage you to identify these key areas in your business and make sure that you have some way of viewing their results accurately and frequently. There are a large number of software packages available that might suit this purpose and in many cases a simple excel spreadsheet will suffice. The most critical aspect of this, however, is that you have a clear understanding of what you are looking for and that you place yourself in direct contact with the big picture.
So, for starters, have a good look at all aspects of your business that directly affect your bottom line and construct a method of exposing these clearly. As already mentioned, these bottom line indicators will be in the form of numbers and/or percentages and they will indicate very clear road signs for you if exposed accurately.
Hint: The EnQ structure described above is more effective if we begin with what we think our numbers should look like and then regularly compare them to what they actually do look like. This comparative presentation provides instant focus to the entrepreneur in terms of an interpretation of results from input and efforts. Using this method, it becomes much easier to identify which staff members and products are performing and which aren’t, which suppliers are sticking to agreements and which market gaps have been successfully filled.
