Here’s why its a problem
A phrase we frequently hear from small business owners is, “I’m tired of running my business by the bank account balance.” Managing your business by the bank account balance is a dangerous place to be.
First, this means you have no real understanding of what’s driving revenue, profit and cash flow. You see sales, profit and cash all go up and down (at different times) but you don’t know why. When you don’t know why it changes, you don’t know what you can do to change it.
Second, this leads to erratic decision making based on assumptions rather than data. When you don’t know what’s causing change in revenue, profit or cash flow, you may find yourself guessing at what to focus on or what ‘levers’ to pull in the business.
Here’s the problem – ever heard the phrase, ‘even a broken clock is right twice a day’? It’s true. When you’re changing tactics left and right (starting a new marketing campaign, pausing another, cutting spend here, changing prices, etc.) you don’t know what’s creating the change in the bank account you’re seeing.
At some point, you’re bound to see a positive change (bank account goes up!) and attribute it to the wrong actions – this is the business version of the broken clock. Now you’re driving your business on false assumptions which leads to wasting time and money.
Why you should solve the problem
You need to be looking at the right numbers driving your revenue, profit and cash flow so you can make decisions based on data and truly understand how to reach your goals.
This means you know how to get where you want to go and you take the guesswork out of managing your business. You’ll always know why revenue, profit and cash went up or down and what to do about it. No more managing by the bank account!
Things you might have tried…but didn’t work
Here’s some things you might have tried to solve the problem, but in the end, didn’t help.
“I’m going to look at my P&L and balance sheet every month.”
It lasted 2 months, we get it and don’t blame you for dumping it.
Here’s why it didn’t work for you – the P&L and balance sheet do not contain all the data you need to understand revenue, profit and cash flow drivers. Here’s an example: the P&L starts with revenue, right? Well revenue is an outcome! You need to know what DRIVES revenue so you can change it!
“I bought this reporting software called ____.”
You purchased a software subscription, connected it to Quickbooks/Xero/etc., and all you got was pretty graphs and more confused about how to improve your business. I’m not here to say there’s no value in these tools – we’re kind of software nerds and who doesn’t love a cool graph – but the problem is you’re connecting it to the same data you were looking at before. In essence, all you’ve done is wrapped nice visuals around the same data and maybe picked up some ‘forecast’ lines on the graphs.
Additionally, there’s no meaningful insights or corrective actions coming from the software. Unsubscribed.
“I’ll read another book…”
Hello information overload. Business owners trying to solve this problem have no shortage of advice they can find in books or online (like here 😋).
You need a simple plan you can stick with month over month and often what you’ll get is more complexity.
How to really solve it
Here’s how we recommend solving this problem.
First, you need to understand what drives revenue, profit and cash flow in your business. We use 15 key numbers and talk about them in the following articles. Become familiar with these numbers, and come back…
Second, now that you understand the right numbers to look at, we recommend you create targets for them. It’s important to set expectations and define what winning looks like in each area. This becomes a roadmap for your business to follow to achieve the results you want.
Third, you need to track your numbers, by driver, on a monthly basis. This is how you’ll replace using your bank account balance to manage your business. You need a good ‘scoreboard’ so you always know how you’re doing vs where you want to be.
***What does a good scoreboard look like? It should quickly and easily tell you how your business is doing (by driver) and what’s preventing you from achieving your targets. It should free you from wondering if everything is going to work out and let you know exactly where you stand.
Finally, what’s all this information good for without putting some action behind it? Not much. The most important thing you can now do is create action. We like to say, the data in your business tells a story. Now that you know your story, what are you going to write a better story? That’s the action plan.
***A good action plan has an objective, next steps to achieve the objective, an owner, due date and status. Without an owner or due date, it’s nothing more than a wish list!
So there you have it. If you want to go from managing the business by your bank account, to proactively managing by data, moving you towards freedom of time and money, start taking these steps today.
If you want to talk to us about doing this for you, to help you grow your revenue, profit and cash, it’s what we do. Click here to setup a short call to chat about your business.