Numbers, Business Owners, Blindspots, and Long Levers: How to Move the World
The first focus area for many of my small business clients is numbers. Strategy, planning, research, personal and organizational effectiveness…nothing else matters if you aren’t in control of cashflow, margins, and so on. It’s a matter of needing to survive before you can learn to thrive.
Everyone has heard of Maslow’s hierarchy of needs theory, that some needs are more basic and must be satisfied before you can move to a higher level need. In the business world, the fundamental needs are defined by numbers. We’re not talking about simply having reliable bookkeeping. This is about having control, and it comes in the form of breakeven and cashflow analysis, balance sheets, income or EBITDA statements, and crystal clarity about fixed costs, variable COGS, and margin. If you don’t know these, your survival is going to depend on luck.
Loyal readers may be scratching their heads. “Mark, dude,” you’re saying, “aren’t you the one who’s been preaching that numbers are overrated?” Well, yes. Trying to avoid your leadership responsibilities (“the numbers made me do it!”) or falling into analysis paralysis are problems fostered by misunderstanding the role of numbers. What I’m talking about here is understanding their role correctly.
For example, just this week, a prospective client explained that his pricing was based on what he called a “fairness principle” – cost of goods plus 10%. He had not considered that to he would need to have more than 100% market share for that 10% to cover his fixed costs, let alone his own cost of living. How fair was that? He was heading for the Big Ugly because he didn’t know his nums.
Fortunately, none of this is rocket science, and generally with a well-designed spreadsheet and a few hours of focused work, you can get the most critical answers. Start with a breakeven analysis. How much do you need to sell to cover expenses? If business collapsed today, how much would you need to sell to stay in business? How long could you tough out an extended period of red ink? Or if you’re a start up, where do you need to be by when?
Of course, you don’t want to live with a green eye shade welded to your forehead. You need to do some work, and then move on. The moving on part requires systems and reports. Different businesses need different reports with different numbers. You’ll need to identify your key metrics, then ensure you have an automated way to review them at proper intervals to guide your decision making. This way lies peace of mind, my friend.
Once you know the numbers intimately and have systems in place to monitor and control them, you can shift attention to the fun stuff: strategy, tactics, relationships, building an kickass organization, whatever bakes your cookies. But first things first, and in the end, that’s OK, isn’t it? By digging into the nums now, you’re building a solid foundation, and you’re learning where you have potential to build leverage. With a solid foundation and long enough levers, you can move the world. Some dead Greek guy said that, back when they were building Western civilization instead of killing it.
Financial control. Numbers. Don’t put it off any longer. Make your calculator your best friend.
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Tags: business plan, entrepreneur, financial control, managing by numbers, planning