Which numbers REALLY count?
Wednesday February 3, 2016
One of the great inbuilt skills of an entrepreneur is being able to visualise the future and see their product or service within it.
I liken it to being at the starting block, able to see the finishing line and also know exactly how you need to run the face and win it. Sometimes, not always, in planning for the race you will prepare a financial forecast but then - get ready, set, go - you’re off and running fast, committed and determined. However this is where you might come unstuck, as you forget to look at the numbers that will tell you if you are really running your best.
In business, that’s where a great accountant comes in.
Accountants love numbers and working out which numbers REALLY count. I’ve put together my top five:
- Profit per customer or per product. It’s easy to tell each month from your profit and loss statement - the bottom line - the number that tells you if you are in profit or not. But that doesn’t really tell you how much. To be really useful you need to know profit per customer or per project or product line. Apply the Pareto’s 80-20 rule and you will probably find that 20% of your customers are providing you with 80% of your profit. Work out who these are, focus on them, find more of them and ditch the rest.
- Cost of sales per channel. In this age you might expect your mobile, digital and social platform to be the most cost effective. However until your measure the cost of sales for every channel you just don’t know. Look at your spend per month per channel and divide it by the value of new sales and you might be in for a surprise.
- Number of leads and conversation rate per channel. OK I’ve tried to squeeze two in here but they are linked. Based on your experience how many leads do you need to generate each month to achieve your target number of customers and at what conversion rate? If you’re not sure, start with something that you can refine as the business gets going, because if you don’t measure something you won’t manage and make it better.
- Cost to serve. In the pursuit of sales we often forget the best way to grow profitability is to reduce the cost to serve customers. To work this out add up all your costs to acquire new clients and divide it by the number of customer served. The best way you have to reduce your cost to serve is by automation of back office functions, anything that means less people power is needed.
- Debtor days. The biggest killer of small business is when it runs out of cash. It can profitable but if money owed isn’t paid on time, you’ve got a problem Houston. So work out on average how long it takes you to get paid, what you can to do reduce it and make sure you follow up on any non-payment quickly. Sadly bigger firms can often be the worst offenders.
So if you want to stay on track, look at the numbers that count for your business every month. Ask your accountant to help you put them in a dashboard. It’s what they are there to do – not just preparing accounts but proactively keep you on track.
Need help? Just ask us to today and we will be there for you.