KNOW YOUR NUMBERS
To run a successful business and give it the opportunity to grow you need to understand where it is at now and how it is doing against your plan for it. You need to Know Your Numbers, but what are these numbers?
The HSE (Health Service in Ireland) ran a ‘Know Your Numbers’ campaign in 2019 to get the public to focus on the key numbers around their personal health. Some of these numbers I was familiar with and others were new to me. I have listed them below for interest, we can draw comparison and learning to Knowing Your Business Numbers. The health numbers are:
1. Body Mass Index: Healthy BMI is 18.5 to 24.9
2. Waist Measurement: Women; 80cm, Men; 94cm
3. Cholesterol: 5.0 or less
4. Blood Pressure: Normal 120 / 80
5. Sugar level: Fasting Blood Test; 5.6
6. Alcohol: 11 standard drinks for women and 17 for men per week.
7. Physical activity: 30 mins per day, 5 days per week
8. Fruit and Veg: Eat 5 to 7 portions per day
When we look at these measures, we can break them into two groups: Reported measures of where we are in a point in time; items 1 to 5 above. And, measures of activity we can undertake which will improve the reported measures at 1 to 5; items 6 to 8.
So put another way, if we drink less alcohol, take more physical activity and eat more Fruit and Veg, then our BMI, Waist measurement, Cholesterol, Blood pressure and sugar levels should all improve.
In business we typically report our position every month. We may even look at some measure on a weekly or daily basis. Accountants focus on the Income statement and Balance sheet and operationally we may add some KPI’s – Key Profit Indicators. Measures of where we are at a point in time include, Turnover, Gross Margin, Net profit, Accumulated profit, EBITDA, Net Asset Value, Cash position, Debtors (Receivables), Creditors (Payables) etc.
KPI’s include the number of sales calls made, clicks through on our website, average order value, number of orders per month, foot fall, sick days for staff etc. If we measure these and improve on the measure, then we should see the benefits turn up in our business.
The problem for business is the same for us as individuals when we look at the health numbers; It’s not quite that straight forward. We all know very healthy people with high BMI or waist measurement – just look at the Irish Rugby Front Row.
I have slightly high cholesterol most likely due to the type of life I lead which has a significant amount of stress in it. Your blood pressure and sugar level will be affected by the integrity of the test with your GP. Last time I got tested I forgot to fast and arrived late and under pressure; the numbers are affected by this. Try debate the alcohol number with any Irish person and you’ll get a few interesting angles and as for physical activity, well running is still questioned in a large part of society. The reality is, there is no one size that fits all.
As accountants we are trained to prepare numbers based on certain agreed principles which are regulated. So at least when we measure our business using accounts, we should produce reliable numbers to measure. However, in our own business we must be specific about what to measure and most importantly, what to measure against.
In golf they say, ‘You drive for show, but you put for dough’ and in business they say ‘Turnover is for vanity, profit is for sanity’. That is certainly true in traditional business but many growth businesses don’t even focus on Turnover but instead focus on gaining users, customers, recurring subscriptions etc. (KPI’s) in the knowledge that it will drive value in their business.
In some sectors, it is all about the gross margin as the fixed cost base is hard to manipulate. Retail is an obvious example where gross margin is key and in manufacturing, we focus not only on gross margin, but we drill into the inputs in more detail and wastage is a key element. In the service industry gross margin is interesting if it is classified correctly but more often that not the service industry measures utilisation of people and value recovered for the time expended.
All these measures are fine but what do we compare them against? A measure is of no value unless we put it beside something to give us perspective. Accountants favour looking back and comparing against the previous year or the previous month. In the statutory financial statements, we are required in law to report against the previous year. However, in the modern business environment it is unlikely that it is of real value to look back more than a few months, as everything is changing so quickly. In a growing business that is active, even reporting against last month can be misleading.
The primary tool for comparison is the budget. Typically, a business sets its budget for the year and if this is well thought out, we can measure the business each month against this budget. Larger corporates and well organised medium sized businesses will have the business process in place to prepare a strong budget. As the year progresses it is important to adapt the budget if the actual performance veers too far away to make the comparison meaningful. Growth businesses need to focus on a forecast or plan and measure against that – a budget will be too granular.
Also, while it is crucial to measure our business internally it is also essential to look outside. Completing a Benchmarking exercise will give us an idea of where we are in our industry and what we should expect. Most industry representative groups provide this information and it can be researched if needs be. The problem with benchmarking is making sure that you are comparing like with like. More of this in a later blog.
So, when you Know Your Numbers, what does it do for you? Most importantly it gives you real time control; when something changes in your business you spot it immediately and you are in a position to act. Accountants often focus on the problem, the fraud, the runaway costs or other: Control often relates to the negative. More importantly, being able to spot the opportunity in your business often comes from signs that your own numbers were sending you. A trend developing in your customers, a team performing better than expected or other positive development.
When opportunity knocks, this is where Knowing Your Numbers becomes a real competitive
advantage. Knowing Your Numbers allows you to unlock that opportunity, using your internal
resources or by seeking financial support externally. Knowing Your Numbers allows you to put a realistic and robust plan in place to unlock that opportunity.