Running a business is a bit like flying a plane. Here's why and how to make your business fly.
We all have key numbers in our businesses (often referred to as KPI’s - Key Performance Indicators) that we need to track on a regular basis. They’re kind of like the dials you’d use to fly an airplane. To help fly your business safely you need to measure and understand your customers, your products, your financials, your employees and your suppliers.
The dials are essential but they are not the whole deal. If we spend all of our time looking at them and not paying attention to what’s around us we can still crash. The information they provide is there to inform the decisions that pre-empt our actions. If we are only focussed on data and aren’t taking action we will also come unstuck.
Alternatively, if we don’t look at the dials and the environment, and simply rely on our intuition or feelings, we can be prone to making rash decisions. Actions taken without considering relevant information can also lead to injury. Before we take off, you need to understand what gives your business lift.
Leveraging Numbers
The numbers within the numbers are also important. You can have an overview of total sales from your customers, but if you don’t know that 80% of your sales come from 20% of your customers you could waste a lot of your time targeting the wrong customers in your marketing.
The 80/20 rule was first noted by the Italian economist Vilfedo Pareto at the University of Lausanne in 1896. Also known as the Pareto Principle, it states that roughly 80% of effects come from 20% of causes. It’s not a completely fool-proof system, but it can give useful insights into your business.
You can use it on almost anything in your life to help you focus on taking action on the things that matter most and to minimise time spent on the things that matter the least.
Imagine, for example, that 70% of your profits come from 30% of your customers. Although it’s not an 80/20 split it still adheres to Pareto’s Principle. Do you know if this is the case in your business? Do you know who these customers are? How do you categorise them?
Let’s say your customers break down into three categories: 10% are raving fans (who love you and buy regularly), 20% normal customers (who buy occasionally) and 70% prospects (that haven’t purchased yet). How do you allocate your resources to these three categories of customer?
Most businesses allocate 70% of their time and money to acquiring new customers (the prospects), 20% to their normal customers and 10% to their raving fans.
When you look at your numbers you invariably realise that the bulk of your profits come from your raving fans. They are also the ones most likely to refer you to others. Acting on the Pareto numbers within the numbers can then help you to take action on staying closer to your raving fans and allocating your resources more efficiently towards them (For example: 70% to your fans, 20% to your customers and 10% to prospects). Understanding the 80/20 rule can take your business to new heights.
Customer Numbers
It’s important to know your customers well, how many you have, how may you lose each year and how many you gain. Which are the most profitable and who are your raving fans? What patterns do they share will help you figure out how best to please them and target others like them? How many prospects do you find each year and how many do you convert into customers? How likely is it that your customers will refer your business to others (a.k.a. Net Promoter Scores).
All of this data falls into areas largely within your control. It’s useful to track, because it can help you take actions like invest in marketing or product development to reduce customer churn. It’ll also help you to pay close attention to those customers that are most important to your business.
Numbers outside of your control can also help.
For example, how large is the total card market (currently £1.75 Billion at retail) and what is the size of your market share share? If there’s room to grow and the market’s growing then you might also decide to act by investing your resources accordingly.
Products and Service
You need to know which products are most profitable and which are most popular in your business. It’s surprising how many business owners don’t know their best sellers. They even allow top products to run out of stock because they are enticed by the next shiny new thing. That’s like letting your plane run out of fuel when you are flying high.
How well do you service your customers? How fast do you turn around your orders? Do you track this each week? How successfully do you fulfil orders (are there shortages?) How many quality issues do you have each month? How many complaints? How many compliments? If you don’t track these numbers you will suffer over time as your disgruntled customers leave or complain about your business instead of referring it to others.
With products, remember to cut your poor performers too. Stay well stocked on best sellers and clear slow moving stock quickly. Know your numbers and own those mistakes as soon as you can.
Financials
It’s obviously important to know your cost of sales, profit margins, overheads and turnover. It’s worth tracking sales orders received each month and sales invoiced (orders shipped) to see what’s ahead.
What’s most important though is tracking cash flow. Loss of profit will slowly cause your plane to descend over time. Not having enough cash in your business is like turning the engines off mid air.
You need a cash flow forecast that acts as your map and then it needs to be checked against what actually happens each month. The map is not the territory. Knowing your monthly overheads and seasonal variables will help with managing these numbers.
Knowing financial data that is outside of your control is also useful. For example, high levels of inflation means that even as consumers spend more, they can afford fewer goods. When inflation is low we might see volumes of sales go up and the volumes may fall when inflation is high. Tracking the climate around you helps you stay grounded when times are tough.
Employee Numbers
How likely are your employees to recommend your business as a good place to work? How many days do you lose to absence? What’s productivity like within your company? How much do you spend on training and personal development with your team members? Who are the weakest links on your team? Are you helping them to improve or terminating their services so that you can replace them with a stronger member of your team? A team of inflight crew are only as strong as their weakest link. They all need to be aware of what the customers want (a safe and comfortable flight) and all work together to provide it.
Suppliers
What about your suppliers? Who performs well and who doesn’t? Can you track their reliability and sales performance? Do you have good communication with them to highlight issues and praise them on good performance?
If you use sales agents, tracking sales orders received and sales orders shipped is vital to avoid missing important customer orders and to make sure the market reality (sales) meets your expectations (targets).
Numbers are only useful if you use them to inform your decision making and take action based on those decisions. If sales aren’t going well, you know the numbers and you don’t do something about it you will suffer even more later.
Remember that you can’t cover every detail when making a decision. If you think about it you can never take enough data into consideration. So it’s important to decide on the key metrics that you need. What are the vital dials are on your dashboard? What information will cause you to crash if you don’t keep an eye on it and take appropriate action? Remember that you can only act on things that are within your control. We can steer the ship and adjust the sails, but we can’t control the weather.
This is important to remember so that you can avoid anxiety about the numbers. A good pilot doesn’t stress about the dials and numbers before her. She stays calm and uses them to take action no matter the circumstances.
