Happiness is a warm spreadsheet!
Tuesday, 10 June 2014
Billy's Twenty-Fourth Law: It really is all about the numbers!
Many entrepreneurs hold great faith in their 'gut feeling' or intuition. A well-honed gut feeling can prove to be an asset when starting your business but as your business grows you must become more systematic and analytical . Many entrepreneurs continue to use the 'seat of the pants' approach long after they ought to. Sometimes this is due to stubbornness, and other times due to a general distrust of figures. Unfortunately, for you 'mathaphobes', analytics are important especially in a growing business in a changing environment.
When you start your business, you can keep track of what is going on in your head. You know exactly how much money is in the bank, how much you are owed by your customers and the birthdays of every employee. As the business grows, it amazes me how wrong many entrepreneurs are about their businesses. These false assumptions lead to poor decisions which, when executed, make the business worse and not better.
I had a client whose sales were declining. I asked her why she thought this was the case and she was certain that it was the lost sales were due to lost customers. She wanted to embark on a price oriented customer retention strategy. I wanted to be sure that customer retention the real problem. I performed a three-year analysis by top ranked customers.
It turns out that she was not losing many customers at all. In the three-year period, she did not lose a single of her top customers. (These customers are in the group representing the top 80% of revenue for the company.) The problem was not customer retention. The real problem was that her top customers were ordering less than they had in previous years. She then called these top customers and found out that they too had experienced a slowdown, reducing the need for my client's product. A price cut as a customer retention strategy would simply have reduced her revenue and her margins. She needed to add to her customer base and find more top clients.
Business owners must analyse the past, to determine how their business is doing, and analyse the future to make better business decisions. I had a client add a new product to his company only to find out later that the new product increased revenue, but reduced profit. I had another who added an entire division without doing a forecast or a break-even.
Analytics are not solely the domain of finance. Every business should track important metrics in Finance, Marketing, Operations and Human Resources. Some are monthly metrics, others are quarterly and others make more sense over a year. These metrics, also known as a ‘dashboard’ or even a ‘balanced score card’ form the basis for goal setting and progress measurement.
One business adage, often attributed to both Peter Drucker and to Lord Kelvin is, “What gets measured gets done.” I believe that the right metrics help. You do not run a business with metrics, however; you can use the metrics to run a better business.
The question you may ask is, “Is there a place for intuition in decision making.” I believe that there is. Many people have insights they cannot explain, but are often correct. Others say that intuition is the sub-conscious processing of information.
Therefore, my rule is that my head must say yes…but my gut can say no. Many ideas and decisions sound good in theory, only to go south in practice. If it does not feel right, I do not do it. This is especially true with respect to people. I would not hire anybody about whom I did not have a ‘good feeling’. That said I would not hire on feeling without checking out if the candidate had the ability to perform the tasks required for the job.
So find some key metrics that reflect those things important to you and to the success of your business. Ensure you are measuring the right things for your business and your situation. Measure and share them, and create responsibilities around them.