Dear Jeremy
Survive or Prosper - Part 5: Increase profits! What you measure you can manage!
In recent months our theme has been how to prosper- not merely to survive and we have homed in on a number of ways in which we can work towards achieving this. Recognising where we are on the path to prospering depends of course on measuring our progress. While there is no way in which we would want to turn all our readers into book-keepers or accountants (after all they are much better at their business than we are and vice versa) we cannot manage what we do not measure! Much of what we have discussed along the way is dependant of first having your books in good order so that they can provide you with useful information, so this month we will concentrate on what might be useful to you: 1. Have I made a profit this month and if so how much? a) This should be straight forward and certain subject to ensuring that all invoices received and issued have been taken into account and entered into whatever form of book-keeping system you have and cash and bank account reconciled to this also 2. How was that profit made? a) This probably depends on setting up your system so that it associates income and costs from different products or services together so you can decide which produce the most profit or contribution to profit. For example some businesses with a number of people delivering the same service will want to know how much revenue and profit is generated by each person. Last month’s newsletter dealt with this area in some detail. b) Often one of the biggest issues here is setting up your book-keeping system so that it does tell you what you want to know. The standard or default chart of accounts (how the accounts are laid out) is just that and all too often people make do with this rather than creating a layout which will tell them what they need to know. 3. What does the financial snapshot of my business look like? a) Who owes me money? b) Who do I owe money to? c) How much money do I have in the bank and in cash d) What assets does my business own e) How much value is there in the business which I own 4. How soon will I know this and will it be accurate? a) Many large businesses are able to run a set of internal or management accounts within a week of the end of the month and some smaller ones can do this too. b) If you place an order for something with a supplier you would normally know how much this would cost and that purchase can be entered even if an invoice has not yet been received for the goods. This will help to ensure that the figures produced take into account all purchases. c) If you undertake work which is not usually finished the same day as it is started you may well need to look at the value of Work In Progress. That is the costs that have gone into a piece of uncompleted work at the point where the information is taken into the accounts e.g. parts and labour. d) There may be costs like rent which may only be paid quarterly but which should be allocated as a monthly cost to reflect the true cost of doing business, this might also be true of accountancy fees and subscriptions e) The idea is not that it will be as accurate as your final accounts for the year but that it is sufficiently accurate and timely to use as a tool to run your business 5. How is my cash flow holding up- can I make sure my business does not run out of money a) Cash is king and running out of it is what causes businesses to fail b) Recording cash in and cash out and planning when costs have to be met in cash will inform the calculation of cash needed. c) Recognising that there is often a delay between invoicing something and being paid for it is key d) Adopting sensible terms of trade (when will I get paid by customers and how much credit do I get from suppliers) is key. Unfortunately receiving a big order from a customer does not necessarily mean you can obtain a much larger amount of credit for this from suppliers! e) For those who employ people and provide a service, like a garage for instance, it is usually necessary to pay for this before you can take your car..... f) Many consultants and similar aim to charge some or all of their fee up front and this can make a huge difference to cash flow! 6. How worthwhile is my spending and time spent on.....networking, marketing, advertising, exhibitions etc? a) This is where measurement in cold financial terms is not always possible or immediately so b) Costs may be in terms of cash and time (for which there may also be a cost or an opportunity cost) c) Return (or what we gain from the activity) may need to identify I. what enquiries we had (numbers and value) II. how many proceeded to a quote (number, percentage and value) III. how many were successful(number, percentage and value) d) Identifying: I. the contacts made (number) and tagging them on a data base (so you can track future performance) II. Time and cost for making contact with them very soon after initial meeting (email / telephone), establishing interest etc III. Time and cost for maintaining contact by continuing to attend a networking event or by electronic means IV. Anyone they might have referred to us (which takes us back to d.i./ii/iii and to (c) again) 7. Non financial measurements: a) Identifying how contacts are obtained- by asking them how did they find you b) A sales map- measuring the conversion rate for each process or sales method will enable forward planning- how many sales (at their average value) do we need to break even? c) Contacts conversion to leads conversion to Quotes conversion to sales will enable all the necessary activity to both be planned physically (the doing of it) and financially (the cost of it) d) This might lead to setting up a referral programme for existing customers, collaborators or suppliers (and we will need to measure how well this works too). e) Many people in business understand intuitively how their businesses work by homing in on some key performance Indicators or measures, examples might include: I. What percentage of available hours have been charged for (how productively busy have people been) II. The percentage occupation of hotel rooms or seats on an aircraft III. Table occupancy in a restaurant (and how many times the tables have turned over i.e. had more than one sitting in a session x2 would mean every table had on average two sittings) IV. The percentage of telephone calls answered within four rings V. The percentage and number of calls unanswered VI. The size of the crowd at a football match VII. The average number of debtor days outstanding (how long are people taking to pay on average) compared with both standard terms and actual practice. If half my customers pay to take their car away then the actual days outstanding for the rest may be double the number of days depending on how the calculation has been done VIII. The average number of creditor days outstanding (how long am I taking to pay on average) IX. Stock turnover-average number of days (how long is stock being held for on average) what stock is sticking or may be unsalable? X. Customer satisfaction scores and / or complaints received and/or levels of satisfaction or dissatisfaction showed on on-line customer forums or social media XI. For many of the above it is important to measure a trend and not just the absolute ratio and also to relate it to time e.g. holiday bookings to seasonality So by measuring these different elements one can manage them, can choose to do more or less of something based on an understanding of the return it brings and depending on the choices made, prosper rather than just survive! For those who run their businesses from calendar year to calendar year this would be a good time to get measuring if you have not already been doing so. Next month sees the end of the year and time to start planning for success in 2012. After all it’s never too early to be more successful! If you have any questions, want to talk through your ideas, get a second opinion regarding your borrowing proposal or business plan, or want some help in looking at any of the above issues please call SatNav4Business on 0845 468 1 468, email success@SatNav4Business.com or complete the contact form at www.SatNav4Busienss.com As ever we provide an initial meeting (virtual or face to face depending on timing etc) of an hour for Newsletter readers- thirty minutes for everyone else. | 
