The last two articles looked at how important it was to set some targets for your business and how this ultimately came down to having a profit target so that you know when you’ve won the game.
So the next question is how do we keep score?
To make a profit you need to have sales and to make sales you need to have customers. So these are good scores to keep: number of customers every day, week, month and total sales value in the same periods.
There’s a problem with these scores though. Sure they are important to measure, but you can’t do anything about them directly. There are activities that go into making these things happen which also need to be measured.
Firstly, to get more customers you have to create interest through your marketing and then convert those enquiries into customers through your sales process.
So it is also important to measure your marketing success by keeping track of the number of leads generated from each of the different marketing campaigns you have running.
Your sales success can be measured by rate of conversion of enquiries into sales.
Total sales is also dictated by how much your customers spend each time and how often they buy from you. It’s important to measure these things as well as they are key drivers of continued sales growth and measures of customer service and satisfaction.
Do your sales staff help your customers to buy everything they need to get the best from their purchase? There’s nothing worse than buying something only to find that you needed an accessory to make it work and having to go all the way back to the vendor to get it. In fact, if there is an alternative supplier, I’m not likely to go back. Ever.
Measuring average sale value and number of transactions per customer per month or year are therefore key measures of success.
Finally, it’s not just the size of the sale that’s important but the profit margin on the sale. It doesn’t help the business if you make a £200 sale but you had to offer a £100 discount to get it reducing the profit margin to zero, when a £100 pound item would have matched the customers budget better and left you with a £50 profit. You might say you would never do that, but it happens. Discounts, bundling, two-for-one offers, etc. are all good ways to boost sales, but beware the effect on profit margins and calculate the profitability before making the offer. If the offer helps to convert a sale that creates a customer that will keep on coming back and the discount can be seen as an allowable investment in that customer then go ahead. An allowable investment is one where the acquisition cost (marketing costs, discounts, etc.) are less than the likely profit gained from that customer during their lifetime as a customer. Which can be calculated as an average of all customers. Ideally the acquisition cost should be less than the profit from the first purchase, but that may not always be necessary if the lifetime value has a high enough degree of certainty.
So these five measure: number of leads, conversion rate, number of transactions per customer, average value sale and profit margin (per sale, or per item, etc.) are the best scores to keep on your way to winning the game. By measuring these you have the opportunity to improve your processes to enable you to win the game faster.
Two more measures are important though. It’s no good making more profit faster if you go bankrupt!
How could that happen? Well if the money starts going out faster than it’s coming in…
For example, you buy goods with 30 days to pay and then hold them in inventory for an average of 30 days before selling them on account with 30 days to pay for them. In this case, you’ll end up paying for goods 30 days before you get paid for them, on average.
Now if you start to grow your business, selling more, faster, then you may quickly get to the point where you run out of money. What’s more, if you stop chasing what’s owed to you because you’re too busy selling, then the cash gap could widen because your customers aren’t paying in 30 days but 45 days on average.
So as well as keeping track of the five profit building scores you also need to keep an eye on your accounts receivable, accounts payable and inventory levels so that you can be proactive in keeping them under control and keep your cashflow positive.
In service industries, productivity is more relevant than inventory, i.e. chargeable hours (hours actually charged to clients). While in manufacturing, both productivity (widgets per day) and inventory (total work in progress including unsold stock) are important.
With those measures in place, you can start to keep score in your business which will allow you to develop and optimise all the relevant processes to reach your profit target more quickly. As things move forward, you might want to look at other drivers and indicators in your business. A bit like measuring assists, number of passes, yards run, corners earned, free-kicks given away in football. They don’t immediately relate to goals scored, but they might give you clues.