October 5, 2011

My company recently hired a CFO to help us get a better handle on our financial situation. My business partner and I had been frustrated for a number of years because sometimes we were uncertain of what the numbers were really telling us. Part of the problem is that we have been fairly successful—the company grows every year and so do profits. Great, right? Only if you truly have a handle on what this means and have systems in place to ensure you are on a sustainable path. But with the never ending deluge of facts, figures and statistics, what do you actually need to see and how often do you need to see it?

I clearly recall the first few profit and loss statements I looked at when we were a fledgling company nearly 15 years ago. I was pleased to see some numbers on a page and it gave some sense of reality that, yes, we had clients and were bringing in some cash. Those first few years were lean as we invested in our growth in a sustainable fashion. It was fairly easy then: three or four expenses, one person to pay and no accounts receivable as we billed our clients electronically through an auto-debit feature. Fast forward a handful of years, add thousand of clients and many more people, vendors and items to track and the overall picture could become obscured at best.

We reached the breaking point as a result of this lack of clarity. In some respects we were victims of our own success. We made more money each year and it all added up: more clients, more income, more expenses and more profits. But the tough economy of last few years have proved challenging for even the most seasoned entrepreneurs and businesses owners and my team was no exception. Even though top line was up, profitability was not up as much as it should have been. Really, we probably could have stuck our head in the sand and chalked it up to the economy but we gritted our teeth and decided to take a closer look at what the numbers were saying.

Retail, wholesale, business-to-business or online consumer products differ in the detail, but the high level generally remains the same. You have expenses and income and you hope that the latter outweighs the former. OK, that’s high level. How do you drill down and get a good picture of your business without spending too much time in analysis and not enough time hunting down new clients or customers?

We looked at all the usual places for some answers. Our company payroll had grown significantly since we hire solid customer service pros, pay them well and offer good benefits. Plus, we were growing to serve our growing client base. Next up, marketing. A seemingly bottomless pit in which all business owners wish they knew which half really worked. Yes, those expenses were up too. We were not surprised we had spent a bit more than in previous years to keep our double digit top line growth. We looked at vendor payments—they all moved up a bit in corresponding fashion as we used more of their services to better service the growth our client base. Oddly, healthcare expenses had gone down.

Our new CFO suggested we look at some other factors that we currently tracked, but tracked loosely. He suggested we look at our sales statistics. Items like the average time to close a new client, close ratio, average revenue per client, etc. (It’s not that we thought these statistics were unimportant in the past.) We quickly determined that our sales cycle had slowed down during the recession. Clients were still choosing us as a payroll provider, they were just taking longer to make decisions. That, coupled with price pressures in the marketplace and our increased payroll expenses, we were doing a great job with 12 percent growth even though profits were not up as they had been in the past with that kind of growth. Thanks to a more in depth look at our numbers, the combination of factors were now coming to light.

Here are three tips to help you get a better handle on the numbers in your own company.

1. Stop being Mr. or Mrs. Smarty Pants

You may think you know everything, I’m going to let you in on a little secret: You don't. This is the first step in any change. Recognize your limitations, and get help from a savvy friend or colleague if you can’t hire a professional.

2. Draw a quick chart of your business operations

Get back to basics and literally scratch out with a pen and paper how money comes in, how much goes out and how your business operates. Draw it in a way that it makes sense to you. You don’t have to speak a financial language to understand it.

3. Analyze, but don’t overdo it

In general, too much information tends to crowd the picture you truly need to develop. In some circumstances hard facts are useful, but just make sure you pick the right metrics. When you determine that what you are measuring is not what you should be measuring, stop and dig around until you find what works.

We are still in the process of creating a company dashboard for my VP of Operations, myself (CEO) and my VP of Sales to use that will give us each the most up-to-date information we need to make better decisions. Get yourself on track and don’t procrastinate as the longer you wait the more analysis you may need to do. Getting a clear picture of what the numbers all mean will help your business thrive, not just survive.

Related Topics

• Money

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ROBERT BASSO, Article, financial management, growth strategies, profit and loss statements, cash flow

Join the conversation ( 1 )

• TJ McCue 7 months ago

  

  Well done, Robert. This is good advice on how the numbers should drive your decision making. I appreciated your way of telling your own story in addition to sharing a number of tips to get me moving in the right direction. Thanks.