What do Your Business Numbers Mean to You?
Your relationship with your business numbers determines how you can use them.
I had a blood test for my PSA last week and I was worried about the number! Why? The simple answer is what the number might mean.
At the beginning of 2020, I asked a client what their numbers were for their business as there are a few key ones I like to focus on. They did not quite turn white… they were uncomfortable though.
I asked them why this was and they said because they did not want to feel like they were not good enough.
When we think of numbers we tend to think of accountants and, somehow accountants and emotions don’t seem to go together. For accountants the numbers tell the story of your business, just like my PSA test told the story of my cancer.
So often I hear business owners admitting that they know how much money is in the bank at the end of the month but they don’t take much notice of the numbers on a regular basis.
I review this post regularly and bring it up to date, make it more current, because how we feel about the ‘business numbers’ can change because of external circumstances. As we enter 2021 in the middle of another lockdown, the question is more focused on survival first. This is because the predictability of sales has become more uncertain than ever before. A change in the “r” number can mean your business is isolated and has no customers.
Sometimes this is manageable: sometimes it is catastrophic! Certain industries such as hospitality, tourism, and traditional retail are all suffering and, sadly, a large number of those businesses may not survive.
In this blog, I want to address the relationship you have with your business numbers and help you understand that if you consider them your good friend, they can help you guide your business to success.
I say a good friend because a good friend never lies to you, they tell it how it is, not sugar-coated, not weighted with any emotion.
Last time I posted about numbers, I focused on how important it is to consider your customers’ survivability and their ability to purchase your product, service or experience still. This time I want to help you to look at your numbers differently.
I want to help you see your numbers as a guide, to help you make the critical decisions that will help you build a business that works for you.
There are four types of numbers that are useful for running your business. They are historical, predictable, possible and assumptive. All of them have a role in helping you build the right business for you. Together, I call them your business pulse. We are going to start with the flakiest of numbers.
Assumptive
For most businesses, assumptive numbers make up most of your annual forecast. They are often based on very flaky assumptions. They are also the most critical numbers for planning the future for your business and assessing what damage any restrictions on your customer might cause.
You see the numbers derived from your assumptions about the results your business will achieve are gold dust. If you predict that you will sell 100 widgets in August for £397 each, you have to work out a plan to make that happen.
However, for many small businesses, financial forecasting stops with statements like:
- I will increase my turnover by 50%.
- I will sell xxx products this year.
- I will earn £xxK this year from the business.
None of the above are bad goals, but where is the plan to make it happen?
Your historical, predictive and possible data can help you shape your plans.
For example, if you know your conversion rate (lead to paying customer) is 5% and you want to sell 20 widgets at £397, how many warm and engaged leads do you need to have? You would need to have 400 leads.
If you have a shop, how many potential customers do you need to make that sale? If you know that historically 1 in 20 customers would buy the widget for £397, you can estimate that you need 20×20 potential customers.
By knowing how many leads or visiting customers you need, you can now work out what activities will be necessary to plan to generate those leads. Your historical, predictable and possible data will give you an idea of how long it takes to convert a new lead into a paying customer, so now you can factor time into your plan.
You can then take this to a different level. Again being guided by the numbers.
Because we now have to rely more and more on digital marketing to attract new customers, we need to understand better how digital marketers see numbers.
To sell 20 widgets at £397 with a 5% conversion rate requires 400 leads.
If you achieve those numbers then each lead is worth £19.85 (20×397)/400 = 19.85)
So if it costs you less than £19.85 per lead you make a profit, if it costs more than £19.85 to get a lead, then you are making a loss.
As you redesign your marketing in the digital world, your reliance on your Customer Intelligence increases. This is because you have to get your message right to attract the right customers and then convert them.
These numbers can then guide your marketing spend. They can help you determine which opportunities are worth following and which are better to dismiss.
It is Charles Dickens’ 209th birthday on February 10th. It might be useful to revisit his advice in David Copperfield.
‘Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.’
Possible
Your assumptive numbers feed into your possible numbers. As you attract more potential customers to your business, they will become qualified leads. These are the numbers derived from your prospective business. You know the who, you are 60% or more sure about the what, the when and the how much. But you need to get them over the line. You need to spend a good deal of time nurturing and handling objections with these people, making sure you remove any obstacles getting in their way and gently nudging them to the close.
Possible numbers are great. They represent your new business or potential repeat business. You can learn a lot from possible numbers, especially about how effective your customer journey from attraction to sale is.
When you discover pinch points or moments along the customer journey where possible customers decide NOT to buy your product, service or experience, you need to dig deep into what happened and make changes. Again in the current COVID-19/government health policy determined world, being clear when changes to the lockdown rules might impact your business is vital. Improving your customer intelligence at this time is a very wise investment of your time so that you can attract and convert more of the right customers to your business.
Predictable
Your possible numbers feed into your predictable numbers. These customers have deepened their relationship with you; they have identified how your products, services or experiences can solve their problem and are ready to commit. For many businesses, this represents the work that has been contracted for, monthly memberships, subscriptions, standing orders or repeat payments of some form.
These are sales that you know will come in, that you are 99% sure will happen. You know the who, the when and the how much in detail.
Predictable numbers give you a baseline that you can build on. If your predictable numbers are covering your fixed costs, then there is less worry about cash BUT you have to keep them in focus. If these numbers start to change unpredictably then something has changed in your market. When that happens you need to identify the cause rapidly. And this change has never been more important because the external circumstances can change so rapidly and unpredictably.
Historical
In many ways, these are the least helpful for planning but very important to show the health of your business. They can inform your decisions and you can learn from them. Knowing how money has flowed through your business in the near past can help you predict how it might flow through your business in the future. It can identify seasonality, peaks in demand and also troughs.
But just because something worked last year does not mean it will this year. The near past figures that make up your operational cash flow reporting lets you know how the business ran yesterday, last week, last month. This is vital information because it gives you a snapshot of the health of your business. If a change to the lockdown rules is going to impact your business, the historical data can help you make quick tactical decisions about staff rotas, how to retain staff, stock orders, raw material supplies and much more.
Suddenly numbers are no longer boring. If you get to know all your numbers intimately, you can start planning your actions to make sure you reach the goals you set. And if you regularly measure your progress, you will be able to tweak, adjust and focus your efforts on the work that will make the greatest difference to your performance.
Get to know your business pulse and use numbers to determine your future, not just to report on the past. Knowing your business pulse has become a vital survival tool for every business to help you make sure your business foundations support you leading your business through these increasingly uncertain times. It is so worthwhile for you to invest the necessary time to get very familiar with your business pulse.
How well do you use numbers in your business? Write a comment below and let me know. Has this post made you think differently about your numbers? What has changed in your thinking? How can you use your Business Pulse to help you react effectively to COVID-19 disruptions?
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How could you implement these lessons in your business? Please comment below.