Understanding the numbers in your business (January 2018)
Are you a business owner who is missing out on the opportunity to improve and grow your business by using management information (MI) to help you make better decisions?
MI provides the tools that enable you to really understand your numbers and can also accurately predict the short term future, enabling you to head off issues before they become major problems that could derail your company.
Large organisations cannot operate without detailed number work and there’s absolutely no reason why small and medium-sized enterprises (SMEs) should not follow the same path. However, before owners and directors of SMEs embark on detailed financial analysis of their business, they need to understand what their numbers are telling them. Most businesses I have come across in the last 12 years or so really struggle to get a detailed handle on their everyday numbers. They may not even know basic numbers, such as how profit margins are analysed.
You don’t have to be an accountant to recognise that when you compare figures in your accounts, some will have gone up and some will have gone down. However, what underpins those headline numbers in your monthly accounts is where the real value can be added to a business. I say ‘monthly accounts’ because if you are serious about growing your business you cannot do so without regular, monthly financials, both historic and forecasts.
It’s not enough to say that sales have risen due to several new customers or the launch of a new product range; you must understand what you are selling to which customers, the margins for each product or service, geographical implications, departmental and divisional splits, and these are just the basics.
In addition to the breakdown of your headline numbers you need to understand the circumstances or the context in which they have been achieved.
Imagine that you employ two people in sales but are looking to reduce that number to one. You would probably start by looking at the value of orders they have won in the last 12 months. So, let’s say salesperson one had orders for £500k and salesperson two secured orders for £200k. It might seem a straightforward assumption that salesperson one is the better performer and salesperson two would be the one you would let go.
However, if you have robust MI you can drill down further into their respective numbers. This analysis might then shows that salesperson one had acquired £400k from repeat orders with the remaining 100k from customers who had expressed interest prior to the current year. Salesperson two’s orders were all from new customers for products that had only just launched. This additional information throws a new light on the performance of the sales team. The context of the sales analysis is therefore critical to your decision-making process.
A good analogy for the use of MI as a tool to analyse performance is found in the world of football. If you ever listen to a football match commentary you will regularly hear possession statistics, but these are meaningless when it comes to the final result. Shots at goal are another statistic used, but we can go a level deeper to look at shots on target, and then another layer still with conversion to goals. It’s the deeper analysis of the headline statistics that reflect the true performance of the footballer and the team.
It’s the same in the world of business. The layers of financial information paint a picture of how a business performs and can capture what may otherwise seem to be intangible, things such as human behaviour and the organisation’s culture.
For many businesses the ability to capture the correct amount of context within their reporting is difficult. If it is too detailed the numbers can become confusing and difficult to communicate. If it is too simple, there’s not enough detail to make meaningful decisions. Commercially-focused, finance professionals can guide you through this process and have an impact on your day-to-day business. These insights are essential if you are serious about growth, being more profitable and putting more cash in the bank.
At Elite MI we are happy to offer any business a free, initial consultation. We will invest the time in understanding your business so we can honestly assess whether our services are right for your business. Get in touch to find out more.
Written by Steve Bull, owner and director of Elite MI Limited.