Financial Measurements: What a Business Owner Should be Watching. Entrepreneur MBA Podcast 2.8
Summary: When running your business, you may develop blind spots that pinpoint the very reason your business is not able to scale. Identifying the key performance indicators that drive your business and maintaining them regularly will boost the company’s performance. Furthermore, analyzing the revenue advantages and cash flow problems of your business’s procurement process will present the security of your business through today’s economic uncertainty.
Today’s topic: Financial Measurements – What a Business Owner Should be Watching
Identifying and establishing your business’s key metrics is extremely crucial to running your business with direction. When analyzing your metrics, you must be able to understand what the numbers stand for on your financial statements. Although it may be easy to become overwhelmed as a small business owner, having knowledge of your business’s financial position will help you make better decisions. With that, you must have a consistent understanding of the stance of your key performance indicators through both the good times and the bad.
Stephen Drake specializes in smaller businesses and startups because of his negative experience with corporate America. These large businesses are usually very complicated and bureaucratic, making it hard for a consultant to make major changes. Small businesses still have similar challenges, but it is easier to work with a leader to convince them to implement simple changes, even if it feels complicated or overwhelming. Starting with one or two key points to focus on allows you to begin the journey of improving the health of your business.
Why You Should Focus on Key Performance Indicators (KPIs)
A strategy that Stephen Halasnik would do with his business coach is put his business’s KPIs together in an Excel spreadsheet and go over them before every meeting started. When Mr. Halasnik started another company, Stephen’s business partner had the business’s KPIs memorized so he would get frustrated when Stephen forced him to put them down on an Excel spreadsheet. Later, when they together started another company with additional partners, reviewing the business’s KPIs before every meeting shifted to becoming the new normal. Remember, just because someone may memorize things and not write them down, does not mean they are smarter. Having your goals in front of you will allow yourself to get into a consistent rhythm of referencing them and comparing your current position to your goal.
Establishing your business’s key financial metrics and following them is like following your body weight. If you never look at the scale, you may not know that over the years, you have added on a couple of pounds. Mutually, if you do not reference your KPIs, they begin to slip negatively. However, if you watch the scale frequently, you have a greater sense of your progress and you are able to keep yourself better inline. Having frequent meetings about your KPIs will keep your business focused on your goal.
Key Financial Metrics
Stephen Drake believes that every business should have a good balance with its company’s financial statements. Your income statement will deduct operating expenses, depreciation, interest from business loans, and taxes from your total sales to state your net income. The balance sheet states your total assets including your current assets such as average inventory and liquid assets, total liabilities that show your current liabilities such as short-term debt and accounts payable, and your common equity. The cash flow statement will show the cash circulation between your operating, investing, and financing activities. Finally, the statement of retained earnings deducts any dividend payments from your net income to represent the amount of money that is left for the stockholders.
Although these reports are important in order to understand your business’s financial position, the business owner should really focus on the day-to-day cash flow and projections. Hiring someone like an accountant, bookkeeper, or CFO to handle the financial aspect will allow you to focus on the operations of the business. This holds especially true with smaller businesses where “cash is king”. It is not fun to see the bottom line amount on a loss statement, so you must understand where your business is making money, and not just revenue, but profits. Once you have located the very activities that make profits for your business you have to find a way to continue this flow of cash.
Some additional KPIs and financial ratios your business should track include: cost of goods sold, profits and losses, liquidity ratio, working capital, sales for the month, total revenue, net profit for the month, inventory turnover ratio, net profit margin, gross profit margin, expenses versus revenue, profitability, sales growth, advertising spend versus revenue, outstanding accounts receivable, quick ratio, commissions spending on salespeople, current ratio, and cost of acquisition. Depending on the type of business, all these categories may not pertain to you. All the financial resources can become overwhelming, so allow a professional to handle assessing the financial health of your business instead. Doing so will give you the greatest return on investment!
Starting the KPI Assessment Process
The simplest approach to establishing structural and functional goals for your businesses is to find 3 to 5 KPIs that drive your business and begin to monitor them. Once these KPIs have reached a comfortable spot to where they only need to be maintained, brainstorm an additional five to seven secondary KPIs to improve. You would not need to reference these as frequently as your primary KPIs, but rather quarterly or whichever time period makes sense in your business’s situation.
The businesses that reach out to consultants like Mr. Drake are looking for an outside perspective and feedback. When working with an individual who is not the business owner, Stephen Drake typically runs into many issues. He has found that these individuals are not always on the same page with the business owner or the president. To run a successful business, it is very important to get the leadership team aligned. Your key leaders and decision-making leaders must align with the business owner’s vision.
To get the team on track, a great tactic is to say, “Can we try this for a quarter?” or “Let’s meet every Monday morning and see what happens.” If the whole process is broken down into trial time periods, it will allow the participants to offer feedback and ideas to the structure as they go to better suit their managing style.
Sharing KPI Progress with Management Team
Finding the appropriate level of transparency to have with the managing team is very hard to do. The business owner needs to find a balance between allowing the managing team to share in the business successes vs suffering the consequences that comes from providing your management team with too much information. When looking back at a situation you will always be able to see the best path you could have taken. You may need to make certain decisions based on the success of your business operations alone to avoid panic with your team.
It is good to set up and adjust expectations as you go. Share these expectations with your managing team so they can understand the future goals of the organization. Transparency is needed more in management levels rather than the lower levels of the business. You should not share all the numbers with the lower level teams and instead have your managers enforce goals on the employees.
Handling KPIs during Recessions
In Stephen Halasnik’s previous business, the managers were paid based on the business’s performance. Naturally, when the business was bringing in money, the team was happy, but when a recession hit, the managers grew worried since the business started losing tens of thousands of dollars a month. Many times, employees can not handle bad news so it can cause great panic. If the managing team begins to panic about their jobs, this high-stress may transfer to the lower level team members.
So, due to the dip in revenue, Mr. Halasnik had to cut costs, which included letting go about 20% of his staff. One manager, in particular, began to freak out on the rest of his management team due to the stress, so Mr. Halasnik had to let her go since she was unable to work properly and coherently with the team anymore. The 2008 Banking recession was about 2 years long but ended up being 5 years long for his business’s industry. Once the company continued to go down, more people were let go, and Mr. Halasnik eventually sold the company.
Mr. Halasnik explains that if he got to redo this experience, he would have never shared the net profit numbers with the managing team. Instead, he would have set targets that are rewarded with bonuses such as: when we have $40,000 a month of revenue you get a bonus, you will get an even larger one if we make $80,000 of profit, or if we go below $20,000 of profit the team does not get anything. With this tactic, the motivation to do well will always remain without the panicking effect that the exact profit numbers may cause.
Mr. Drake recommends having about 3 to 5 leaders within your organization. If one leader decides to show their true colors and freaks out in a way where they are unable to proceed, cutting them out of the business could be for the better. Finding the right core people with whom you could be more transparent and share the actual revenue and profit numbers would be convenient. Letting employees go is not always the easiest decision, but make sure you keep those that are willing to fight and work with your business to ensure its recovery.
Frequency of Tracking KPIs
Mr. Drake believes that if you are not taking a hard look at the KPIs to examine the business’s past, present, and future every quarter, you are doing a huge disservice to your business. Even if your reporting has stayed the same as the last time you reviewed it, you should still conduct a review and record your findings quarterly to document consistency.
If you are a smaller business or a start-up, it is essential that you meet at least once a month, if not more to discuss your company’s performance with the KPIs set. If you wait more than once a month, or a given period, you can start to get disconnected from your vision. If needed, review your business’s KPIs as frequently as weekly if you really want to ensure the business’s success. If your business is not doing as well as you thought, it is okay. However, you must construct a plan for the next 12 months to three years to achieve the initial goal.
You may also choose to discuss your business’s KPIs monthly and focus on marketing goals weekly. Alter this frequency to be unique to your business.
The KPI Pyramid Model
The purpose of this podcast is to help small businesses typically under $5 million in size get to over $10 million. If you want to reach the $10 million mark, you have to establish KPI goals and means of measuring them.
Mr. Drake sees this approach as if it is a pyramid. The base-level of the pyramid holds the financials including revenue and expenses, the middle-level supports the decisions about operations, resources, and technology, and the top-level is the sales and marketing that drive your business. Within each of these three segments of the pyramid, you need to have KPIs that are being managed.
There are a lot of reasons why a business owner would contact Stephen Drake for consulting. He mostly helps leaders who feel overwhelmed on a daily basis. As a business owner, there is so much that comes at you from every angle. Many of these things are what you ‘should be doing differently,’ whether it is your finances, marketing, or other. Stephen Drake will cut through the noise and simplify everything starting at the root of your business. He will evaluate what you are doing well and what needs improvement. He helps answer questions like: Do you have all the right people and systems in place? Is your pricing correct? And is your marketing effective?
Examining all the moving parts of your business and finding ways to work with your leadership team will help Mr. Drake understand what the business is all about and quickly diagnose some opportunity areas. He will conduct a simple SWOT analysis to help determine the business’s strengths and weaknesses and implement his findings to bring in new customers and increase customer satisfaction.
Most of the time, Mr. Drake will be able to pinpoint the lacking areas whether it is the need for better financial tools, HR support, marketing insights, or more, and help the business get what they need to succeed. About 80% of the time, he can help, and all other times he will bring in professionals to help. As a consultant coach, Mr. Drake wants to help you look at your situation and then figure out what you need to do to reach your business’s goals. All businesses have blind spots. Stephen Drake can help locate them and help you attack them.
Stephen Drake’s business’s name, 1818 Consulting has meaning behind it. The 1 and 8 stand for the truth, good judgment, new creation, and new opportunities. Together these numbers symbolize the energies of success and achievement. Mr. Drake used these numbers to mix in personal values with his business values. He wanted the business to represent a new perspective, outlook, and positive energy to build on success.
About the Guest Stephen Drake, 1818 Consulting
Today, I am excited to be speaking with Stephen Drake from 1818 Consulting. Stephen is a dynamic and proven business leader with more than two decades of experience across a variety of industries, working with businesses ranging from Fortune 100 corporations to small nonprofits. Stephen now serves as a consultant and offers fractional services with his company 1818 Consulting. He helps business leaders run their businesses more effectively by providing a unique combination of analytical and strategic insights.
About The Host Stephen Halasnik, Financing Solutions
Stephen Halasnik is the host of the popular, The Entrepreneur MBA Podcast. The Entrepreneur MBA podcast’s purpose is to help small businesses get over the $10 million per year in revenue mark. Mr. Halasnik is the Co-founder and Managing Partner of Financing Solutions. Financing Solutions is a leading provider of Lines of Credit to small businesses and nonprofits
Mr. Halasnik is a graduate of Rutgers University and has an Executive Masters from the MIT Birthing of Giants Entrepreneurship program.Mr. Halasnik has started and built 6 companies over 25+ years with 2 of those businesses making the Inc 500/5000 fastest growing list. Mr. Halasnik is a best selling Amazon author on business and regularly tweets about his ideas about growing a business. You can also find Mr. Halasnik on youtube talking about Entrepreneurship.
Mr. Halasnik loves small business. He lives in New Jersey with his best friend, his wife Gina. Mr. Halasnik’s number one purpose is raising his two boys, Michael and Maxwell, to be good men.
About Financing Solutions
Financing Solutions small business financing product is a great alternative to a traditional bank line of credit because it costs nothing to set up, nothing until used, and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Small businesses use their line of credit to help with emergencies or opportunities when cash flow is temporarily down (i.e. Payroll funding)
Please feel free to fill out the no-obligation, 2-minute business line of credit application here.The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
Note: Financing Solutions donates 10% of its profits to various nonprofit charities