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The Magic of Measuring

Written by: Larry Mandelberg

Article Overview: When you hear the word magic, what's the 1st thing you think of? Peter Pan? Harry Potter? For me, magic immediately evokes something so powerful that even I can't screw it up. And that's exactly how magic numbers and measuring work. My goal with this article is to help you get a perspective quite different and apart from what your accountant or financial adviser may suggest. And it's probably the best thing you could ever do for your business - making it fool-proof. Even better, it's MAGIC!

The Magic of Measuring

In business, everything boils down to three questions:

1. What does it cost to purchase or produce?
2. What does it sell it for?
3. How much money does it make?

Bottom line, businesses exist to maximize profits.

Every business tracks sales, money and hours worked - important measures to be sure, but all are lagging indicators. If something goes wrong, it's too late to undo the damage.

A handyman's rule of thumb is measure twice, cut once. With most insights, what works well in one environment also works well in others. In business, this rule of thumb is often ignored.

Why a business is doing well or poorly is in the details; how much inventory to stock, what copier to buy, when to add a salesperson and what you'll need for future cash demands.

Unfortunately, immediate needs are a constant distraction. Measuring takes time and discipline, and forces management to think strategically. The result? Measuring is often ignored, and consequences are recognized too late.

If you don't measure how well you perform, it's impossible to know you've lost anything when performance declines. According to Paul Spector, president of The Spector Agency, "Measuring results is the only way you can possibly improve upon them period to period."

There are dozens of things beside customers and cash flow that need to be monitored.

Magic numbers

Wouldn't it be nice to know how much you have to sell for profits to cover the cost of acquisition and retention?

Add all costs spent finding new customers last year - everything from membership dues to lunches with prospects - and don't skip telephone and maintenance costs. Put everything into one of three categories:

1. Support for existing clients, which is offset by profits from sales.
2. Efforts to attract and engage new customers offset by new sales.
3. Waste.

Want to eliminate as much risk and uncertainty as possible? Count active customers at the beginning and end of the year. Next, count new customers secured during the year and calculate retention and acquisition costs.

Knowing these numbers makes it easier for you to manage your business profitably. Whether you want to accept this premise or not, the survival of your businesses hangs in the balance every single day.

Inventory scenario

Measuring begins with questions and understanding the value of the answers. For example, on average, how many line items do customers purchase per order? Would it be of any value to know it?

The answer can be found in the story of an auto parts store client that had a sizeable inventory. Jim knew his inventory turnover and the value of his inventory, but he didn't know the answer to my question and didn't think it was important.

"How much does it cost to ship an order" I asked, "regardless of value or profitability."

"‘Don't know."

"How many items do your best customers buy per order, per week and per month?"

"Don't know," Jim said.

The information was pretty easy to get out of his computer system so we did some analysis. Jim's largest accounts averaged from 2 to 8 invoices each day. Customers ordering the most frequently were calling for supplies whenever they ran out of something. Many purchases weren't urgent, yet they were all treated the same.

Jim and I talked about how to turn this problem into a win. Jim's clients depended on him for many basic commodities. We asked these customers to increase their stock of basic items if we consigned them. They wouldn't have to pay until the product was used. That way Jim didn't have to deliver every time a customer ran out of something. Fewer trips meant fewer invoices. It also kept Jim's phone lines and sales clerks free to handle more urgent calls.

Because Jim had more merchandise at his customers' places of business, they began using and selling more. It also became difficult to steal Jim's customer, and it all came from looking at the average line items per order.

The bottom line

When was the last time you reviewed the profitability of your customers against all your costs? After all, you wouldn't have a receptionist if you didn't have a business. Because the business exists to make a profit, doesn't the receptionist have to generate a return on the investment you are making in him or her?

How do you know when is a customer is profitable or an expense? How do you know when to fire a customer? What do you do when you want to increase revenue? Tell the sales staff to work harder?

Every business has a set of magic numbers. The trick is figuring out what yours are and using them to manage your business.

I'm not talking about financial ratios or accounting information. They're great for telling you what already happened. What you need are the real-time numbers that tell you how well your organization is performing at this very minute.

Leadership requires the ability to balance tactics with strategy and the ability to jump from one to the other without missing a beat. It's the art of blending people and processes against competitive threats, government regulation and the long term impact of decisions.

Measuring is one of the best ways I know to make your job as easy as possible. Find your magic numbers and watch how much more productive and effective your entire organization becomes.

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Article Tags: financial adviser, magic numbers, perspective



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