If you are familiar with the book (and recent movie) Moneyball, then you are aware that it is about improving performance by identifying the key stats that drive results. I am a big baseball fan and loved the book and the movie. What I loved even more is applying the concept to business. Ask yourself “What must we know in order to improve business results?” Here are three suggestions for managing by the numbers in YOUR Company!
1. Building your sales forecast?
How much do you analyze your customer statistics? Many companies know anecdotal information about customer news—good and bad, and probably track monthly sales totals and averages– both of which say little about how you are really doing. The key to completing a sales budget (and developing sound sales strategy) is to understand the patterns in customer buys. Have you analyzed the following in creating the 2012 sales budget?
- Customer tiers: What percent of your customers contribute 20% of your volume? 50%? 80%? Do you have too many eggs in one basket or do you have too many small, likely unprofitable, accounts that take time away from the customers that matter?
- Customer purchase patterns: The greatest impact in sales and the most cost-effective to manage is the purchase from existing accounts. What percent of sales is from increased purchases (frequency and/or volume) of existing accounts? What was the decline in sales from existing accounts and was it spread among many or isolated among a few? Is it frequency or volume? And is it tied to purchases of new items or lack of re-ordering standard ones? How you manage this information is critical to achieving your sales goal.
- Driving new customers: By understanding patterns among existing customers you can more effectively target new customers. You want to look for those who are similar in type and need to those customers who are profitable, growing and great advocates for your business. Don’t waste time on those who don’t meet these criteria, making your sales team more laser- focused with better results.
2. Do you have leading indicators to guide business management?
Most companies keep an eagle eye on bottom line, cash flow and budget management. Every month companies plug in the latest numbers and look at how the variances are playing out. TOO LATE! Tracking numbers after they happen is an exercise in lagging indicators–once the number is in the books, it can’t be changed. The goal is know your leading indicators–the measures that tell you the market is changing and the business needs to adjust. Have you identified your leading indicator? Here are a few examples:
- Tractor Supply, a retailer targeting suburban ranchers, tracks payment type and average size of transaction. If the average amount spent per trip is steadily heading down and payment by credit card is going up, they dig much deeper to determine if a shift is coming and if they need to get ahead of it.
- As a manufacturer of tires, Bridgestone Americas, monitors commercial tires. If goods aren’t being shipped over the open road as much, thereby reducing miles of wear on tires and thus sales, they recognize that consumers will be hit within 18-24 months, giving them an opportunity to anticipate and regroup ahead of time.
What might be YOUR leading indicator?
3. Do you budgets to accountability?
Recently, I was working with a new client that had provided a forecast during their strategic plan efforts, and a few months later they showed up with the “real budget”. Is it a surprise that the revised budget had lower sales and higher costs, straining EBITDA? It was clear the first number was a swag. It may well be why 37% of strategic plan growth potential is never realized. Excited executives fresh off of a strategic planning day can be overly optimistic when developing forecasts. When completing a strategic plan forecast, it is important to build it initiative by initiative, documenting assumptions about incremental costs, savings and sales. If your budget isn’t broken out by initiative, it will be very hard to manage and unlikely that the goal will be attained.
To create a more actionable forecast, start with a base number that is business as usual. Growth may be negative and expenses may need to be reduced. Now add in the initiatives you plan on undertaking this year one at a time. Add in associated people, operating and capital expense as well as projected sales to calculate return. Building a forecast this way accomplishes the following:
- Clear line-of-site to assumptions which means the numbers can be explained to anyone (staff, bankers, board). If and when the numbers need adjusting, corresponding decisions can be made with regard to the viability of the initiative. If expenses are twice as much and sales half as much, is this program viable as currently implemented? Probably not. If you don’t know which expenses are associated with a given initiative, it is harder to take corrective action.
- Overall budget management. By seeing how each initiative contributes, if money runs tight, it is easier to eliminate the initiative doing the least for you overall, even if it is meeting plan.
- Accountability established. Expectations regarding deliverables are clear. The program champions know the target and will be expected to explain variances and implications. Investments or expenses are connected to returns–if one changes the other does as well.
So, are you ready to identify the key stats in your business that drives results? P.S. If you are interested, there is a fourth key moneyball question. Email me and I will send it to you! mreynolds@breakthroughmaster.com