What do I have to manage? # 2 – My Trading Performance.
Saturday, March 27th, 2010The second most important aspect of your business that you simply have to manage, is your overall trading performance – and by doing it regularly; daily if necessary! Forty years ago, when business was more sedentary; and there was a great deal less competition; and we certainly didn’t have the plethora of products and services that abound today, – it was common for business owners to have sight of a set of financial reports once a year, – usually about nine months after the financial year end; and even then, it was largely to comply with income tax requirements.
Today, margins are constantly under pressure; new products, new fads and trends are coming on to the market at an ever-increasing rate, so if a business owner wants to keep his head above water, he simply has to keep his eye on the numbers.
Many business owners don’t do this and operate on the basis of “as long as I’ve got cash in the bank, I must be making a profit.” While this is generally true, to a certain extent it disguises the fact that the business could be under-achieving and any negative trends may not be seen until it’s too late.
Most small business-owners have some idea of what the break-even point for their respective businesses is – it’s a sort of gut-feel! They operate on the basis that as long as they’re exceeding their ‘break-even’ they’re doing alright. That’s a very negative way of trading and is likely to cost a great deal in the long term. Even though business is all about the bottom-line, it’s not just about the bottom line! Does this sound crazy? Well, we do have to make a profit if we want our businesses to stick around and grow, but monitoring your trading performance is not just about checking on the bottom line. It’s more about what happens between your sales and the bottom line that matters – because there’re huge amounts of opportunity lurking in every expense account, every product, every customer, every supplier – and even in the productivity of your employees. Do this well, and the bottom line will take care of itself – and will surprise you!
The fact is most small business owners could be doing very much better if they knew how to apply a few basic rules.
With margins so low and competition so fierce, we need to know TODAY, how well we did, YESTERDAY! And we need to have some sort of financial analysis of our performance that will help us to fine-tune that performance for TOMORROW.
John Maxwell, the popular author of a number of self-help and leadership books, penned a law of teamwork – called the Law of the Scoreboard, which states: “the team can make adjustments when it knows where it stands.” (The 17 Indisputable Laws of Teamwork – emphasis – mine.) He goes on to say that the Scoreboard is essential to understanding, to evaluating, to decision-making, to adjusting, and to winning. Simply put, he says that “When you know what to do, then you can do what you know.”
These are important aspects to consider and I want to unpack them a little more:
- Understanding. There are thousands of small business owners out there who know very little about basic financial management. They rely heavily on an in-house bookkeeper, or a firm of practising accountants for information, but inevitably, these folk tend to be reactive in nature, and they tend to only respond to requests from the employer or client; very rarely to pro-actively offer advice when its needed. This is also largely because they only have sight of the financial information a long time after the fact. So, – if you’re one of those business owners, then you need to get out there and attend a course on financial management for non-financial managers. (If there isn’t one readily available in your town, contact us and we’ll make a plan for you.) Get to know the basics; so that you understand the elements of costing, the difference between mark-up and gross margin; labour productivity, among others. You may know your product better than anyone, and you may make it better than anyone, but if you don’t understand the financial concepts that go into it, you will lose out.
- Evaluating. Once you have an understanding of how the various cost components come together, you can very soon see which products are the most profitable; whether you should be making certain products at all; whether certain customers are worth selling to, and whether your overheads and drawings are in keeping with your income.
- Decision-making. Now, I don’t know about you but if I don’t know what’s going on in any given situation, then I find it very hard to make decisions; and what’s worse – this just leads to stress. In fact, indecision is the mother of stress! And, if you don’t know what’s going on, and you do make a decision, it may well end up being the wrong decision – and simply because you did not have the correct information to enable you to call it right first time!
- Adjusting. Once again, if you’re monitoring your trading performance on a regular basis, and you understand the fundamentals that make the business tick, and you’re able to evaluate the results and come to a decision – you can make the adjustments you need to, quickly! I can’t tell you the number of clients I’ve worked with over the years who vacillate on the important decisions, and it ends up costing them money. If you’re bleeding and you make the decision to stop the bleeding – guess what? It won’t happen unless you make the relevant adjustments – unless you implement; or execute – unless you do something!
- Winning. Well, this goes almost without saying doesn’t it? If you’re on top of your game in this regard – you understand the business dynamics; you’re able to evaluate the results, make quick decisions, and implement your action plans – you will win; you will succeed!
With this in mind, there are a couple of basic requirements that I believe are non-negotiable for small businesses, if up-to-date and accurate trading results are going to be available. In the next newsletter, I’ll go into those in more detail.
