“Susan, I hate to admit it, but I don’t really know what it means to “know your numbers.””
The systems engineering consulting firm Owner was frustrated with lack of success breaking through what seemed a cement ceiling of $2 million annual revenue.
“I read my P&L every month and I understand cash flow, but these aren’t helping us grow.”
Have you ever felt, deep in the back of your mind, that everyone seems to know their numbers but you?
You are definitely not alone.
It’s one thing to see the numbers, and even to remember them from month to month and it’s another thing to ‘know’ them, to understand the stories they’re telling you about your business.
To be like a detective who sees beneath the surface and who deduces conditions that aren’t obvious.
Here’s how to ‘know’ your numbers:
- The top line, or revenue, gives you a very high level picture. Of course, without revenue you would not be in business, but knowing total revenue is not enough.
- Dig into revenue and identify how that revenue number has come about.
- What is being sold? How many of these each of these items (products/services) are being sold?
- Are these one-time purchases or repeat purchases?
- If you plotted the number of sales per item over 6 months, would you see a steady line or lots of ups and downs? Do some items sell steadily and others only occasionally?
- Who is buying these items? Can you find any common characteristics between the buyers? What are they?
- Do you have clear target markets? Do you see sales coming from them?
- Look closely at your expenses. Expenses for professional and business services are heavily weighted to personnel compensation and benefits. What is your overhead? Operating expenses?
- What is the bottom line? That means what is the difference between revenue and expenses? Without getting too deep in accounting territory (interest, taxes, depreciation and amortization), you should be able to determine if your revenue is exceeding your expenses.
Once you’ve become familiar with these numbers, you can start doing some analysis.
- Analyze your prices or fees. How have they changed in the past year? Why did they change or why did they not change?
- Is your goal to cover costs and add a percentage for profit? Are you concerned with being competitive with others in your industry?
- What is your pricing model: hourly billing, flat or fixed fees, project fees, or some combination? Have you tried value based pricing but lack confidence in it?
Don’t forget your own compensation
- Are you taking the market rate salary you’re entitled to?
Do you understand what profit represents?
- Profit, or what is left after paying all expenses from revenue, serves three purposes for a privately held company like yours.
- It reflects effective management of the company.
- It is the return on your investment. Remember, when you established your firm, you chose to put your money into the company rather than into a financial asset which would have given you a return on your investment. A portion of each year’s profit is the return on your investment you’re entitled to by virtue of investing in the company.
- Profit also represents a premium for the risk you’ve taken with your investment. If you had put your money in financial assets, you would know that part of the expected return would be related to the riskiness of the financial asset you invested in. Owning a business is a high-risk investment which earns a risk premium compared to the low risk of some financial assets.
- What you choose to do with the profits is separate from these purposes of the profit.
Design a plan
- Now that you know your numbers, you can design a plan to break through your revenue ceiling.
- What products and services should you keep offering? Which should you discontinue?
- Raise prices across the board within 30 days. A 10% increase will increase revenue, will not increase expenses, and therefore will deliver 10% more to your bottom line.
- Beef up or begin retention marketing to your best clients. This means going back to previous customers and clients and making new offers to them.
- Adopt a new pricing model. If you’re billing by the hour, switch to fixed or flat fees. If you’re using fixed/flat fees or value based pricing, switch to a pricing model that ties the impacts you deliver to the fee. This is IMPACT Based Pricing.
- Review your client/customer records and keep only the great fit and good fit clients. Designate the bottom 10% for referrals elsewhere or simply no longer do business with them.
The systems engineering firm Owner spent a few hours with me going over these numbers. She immediately saw four areas that were holding them back from more revenue: 1-too many low paying customers; 2-not raising their prices in more than a year; 3-no retention marketing; 4-using a combination of fixed fees plus hourly billing. This happened when the scope of the project expanded beyond what was included in the fixed fee. We are working on implementing IMPACT Based Pricing.
Don’t stay stuck
You work too hard to be stuck because you don’t know your numbers.
The way I see it, knowing your numbers is simply reading the numbers like a detective reads clues. What are the numbers telling you and what should you do with the stories they tell?
Curious about the stories in your own numbers? Text NUMBERS to 703-801-0345 or schedule a Virtual Coffee with me.