Business is therefore pretty simple. It’s much like a sport. Let’s use hockey as an example. If you want to play hockey you know two things: Firstly you will have to run and secondly you will be tackled. If you don’t want to run or don’t want to be tackled, then don’t play hockey. Simple! In business, the two critical elements are marketing and finance. They’re also the two most important areas to master and literally solve every other problem a business can present.
So let’s get started on Finance and ensuring you can deliver a massive financial impact.
1. Know your ‘5 Ways Numbers’
You cannot run a truly successful, profitable and sustainable business if you don’t know, track and influence your 5 Ways Numbers. If you’re not sure what I’m talking about feel free to watch this short video explaining it here.
In business we know we need more customers, more revenue and improved profits but individually those 3 elements cannot be altered. They’re all made of the key 5 Ways Numbers that you can influence: 1. Number of Leads (Marketing), 2. Conversion Rate (Sales), 3. Number of Transactions (Repeat Business), 4. Average Sale Value (Cross sell, upsell, bundling) and 5. Margins (Your Profit Margins). Start tracking these 5 Ways Numbers and have strategies that impact each area individually. Through the compounding effect of the increases, you’ll see a massive improvement in your overall profit. In fact, just a small increase of 10% in each of these 5 Ways areas will result in a 61% increase in profit. Do that now, then simply rinse and repeat forever.
2. Debtors Must Pay
It’s often interesting how difficult it seems to ask for our own money, isn’t it? Someone did business with you, gladly took the product or service from you, but then for whatever reason didn’t honour the payment terms and now you can’t ask for the money. YOUR MONEY! Ask for it!
Don’t fall into the trap of waiting, being nice, falling for delaying tactics etc. Those that ask for their money usually get paid. Those that don’t ask normally have to wait until we’ve paid those that ask. You’ve done in. I’ve done it. If someone has specific and agreed upon payment terms, a good system of following up, reminding and asking for their money – I normally pay them first. Be that person that has that system. Have clear, preferably written and documented payment arrangements and terms. Have a clear system of when invoices go out, confirm receipt of those invoices and that the accuracy is accepted, send reminders before the payment is due and then have a very specific follow-up system that escalates higher up your organisation (and theirs) to ensure you get paid as originally intended. Don’t feel bad. Remember, IT IS YOUR MONEY!
3. Turnover is Vanity, Cashflow is Sanity but Profit is King
Perhaps a slightly different take on the old clichés but now more relevant and important than ever. Whilst every business uses some form of turnover as part of their goals, budgets and KPIs it cannot be your only measure. Many businesses have gone bankrupt chasing turnover whilst ignoring cashflow and overall profitability. All 3 need the same attention and need to be critically measured and managed. Profit is not a bad thing. Profit is simply the measure of growth. If you’re not growing you’re already dying. Your business is the same. So if you’re currently not making a profit you’re already starting to die. Therefore start every year with a profit target and budget from the bottom up. If you want to sleep at night make sure you manage cashflow. Perhaps re-read point 2 above on debtors. The money coming in (daily, weekly and monthly) needs to exceed the money going out. Make sure you design and drive that.
4. Review Costs Regularly
Stability breeds comfort and comfort allows fat to settle in. That’s another universal truth and also impacts a range of areas in our businesses. When we’re new to business and operating on the edge, we seem to watch our pennies a lot more. As we grow and relationships form we seem to let the numbers look after themselves and lose that hawk like view over them. Every year set yourself the target of saving a minimum of 10% in your total expenses. Some line items will allow for more savings than others but work towards the overall saving for the business. That way you have to still get a few quotes from competing suppliers or service providers – just to keep everyone honest. You have to review cost item by cost item and give serious consideration to the effectiveness of your spend and whether it’s still critical to your business. Markets also change and a good deal a few years ago may very well have you now paying more than market value. Renegotiate where required or even change every now and again. That way you stay lean and mean and ensure long-term viability and profitability.
5. Budget vs Actual
Some business owners are good at budgeting. Others are really good at recording the actual numbers. Very rarely do the two however meet. Whilst a budget is important, perhaps even critical, it means nothing if your reporting of the actual numbers are not up to date AND you’re not comparing the intended reality (budget) with the real reality (actual). The purpose of the comparison is to ensure you drive a different agenda going forward if you’re not on budget. That also means that should you have lost a month, not hit budget, the month doesn’t disappear or reset. We don’t just start the new month and try harder. No! We carry the loss to budget from last month and now not only have to make this month’s budget but also the shortfall from last month. That way we’re always correcting to ensure we make annual target. Don’t let it get away from you. Have a detailed budget and compare it regularly against the actual performance. Adjust accordingly.
6. KPIs – Leading and Lagging
A Key Performing Indicator (KPI) is often used as a measurement tool to track progress and move towards reaching goals. To explain this fully I’m rather going to use a metaphor outside of business. Say you set the goal of losing 20 kgs. The KPI you’ve set for yourself is to lose at least 4 kgs this month. The 4 kgs is a lagging KPI. You’ll only reach your KPI after a series of other things have successfully happened. The result therefore ensures your KPI is attained but it lags several other things. Exercising a minimum of 30 minutes, three times per week are however leading KPIs. Maintaining a specific daily calorie intake is also a leading KPI. To hit my overall goal of losing the 20 kgs I, however, need both the leading KPIs, measured more frequently (even hourly or daily) as well as the interim hurdles I need to reach which are my lagging KPIs. If I focus on both, I’m much more inclined to hit my overall goal. Breakdown your business goals into lagging KPIs to track and measure and then break down the lagging KPIs into specific leading KPIs to influence and measure more regularly. Your future self will thank you.
7. M.R.S. R.O.I.
I’m probably most passionate about this for business owners. It’s also the area that gives me most of my grey hairs and keeps me up at night. I’ve asked literally thousands of business owners in the past few years to write down what they believe their Market Related Salary (M.R.S) to be. What would I need to pay you if you came to work full-time for me? Now write down what you pay yourself regularly every month. Does what you currently pay yourself exceed your M.R.S.? Why not? Sadly less than 1% of business owners I’ve asked this question have actually been paying themselves more than they’re worth. Sadly it gets worse. As a business owner you need to get paid your M.R.S. for the work you do. You’re there daily directly (or indirectly) involved in running the business. For that, you should get paid a salary. On top of that, you’re also a shareholder and for that, you should get a return. On top of the salary for the work done you should be chasing a Return On Investment (R.O.I.) that exceeds what you can get from a bank, listed shares or property. If you’re taking the risk as a shareholder, more so than when investing in those asset classes, you should be getting an additional and commensurate return as well. Staff members need to get paid for the work they do. As a business owner you’re normally still a staff member as well. Shareholders get paid from profits and get a return on their investments. Start budgeting for and chasing both. Make M.R.S. R.O.I. your new mantra!
Whilst I know your accounting teacher at school either inspired you for life OR NOT – numbers, accounting and finance are crucial to your business success. Get to know the rules of how the game is played and just start playing the game. The more you play, the more it makes sense. The more it makes sense the better you become. The better you become the more you win at the game of business. My wish for you is to go win more in business.
Harry Welby-Cooke, Country Partner for ActionCOACH Southern Africa