Imagine you are flying over the Pacific Ocean on an airliner and the captain comes on the PA system. “Ladies and gentlemen, I have some bad news and some good news. The bad news is that all our instruments are out. I have no idea where we are heading, how much fuel we have left or what height we are at. The good news is…we’re making great time!”
Scary? Hell yeah!
Trouble is many owners run their businesses like this. No real idea of where they are going, whether they are heading into danger, but never-the-less they remain eternally optimistic. As the business grows the almost casual attitude becomes more serious and you lie awake at night wondering how you are going to make payroll next week and whether clients are going to come through with those promised progress payments. You wouldn’t fly a plane like that, so why run your business like that?
What is needed is a dashboard of measures to show you how you are “flying” and if you need to make any course adjustments. So, what should be on that dashboard and how do you measure it? Like most owners of construction trades businesses you have probably never learnt much around financial management of a business and run things on a combination of gut feel, checking the bank account regularly and your annual hour sit-down with your accountant. Your wife might look after the bookkeeping side of things, but she probably focuses on just processing transactions and making sure the GST and tax payments are made. A slightly higher level of “knowing your numbers” is needed in your business to help assure long-term success.
A dashboard is a type of feedback system. It is giving you information in an easily understood form about what is happening in the systems of the vehicle you are in, be that a car or an airplane. An airplane also will have a forward-looking feedback system, commonly known as radar. Thinking about your business what parts of your marketing, sales, operations, team and financial systems would be helpful to have a simple measure of performance? In some areas it is extra helpful to have both a measure of what is going on right now and what the near future holds. You can delegate or outsource the processing of payroll, preparing invoices, paying the GST, etc., but the owner MUST know the key numbers in their business, daily, weekly or monthly. Not just once a year when you meet the accountant and ask “how much tax do I have to pay?”
The biggest dial on your dashboard, in my opinion, should be the Gross Profit rate. That can be measured job-by-job and monthly and should be expressed as a % of Sales. This shows how efficient the business is in converting Revenue into Profit at the job pit face and should be compared with the target rate calculated in your annual budget. You do a rough budget each year for your business, right? If not, get hold of me HERE and we can do that together. For an earlier article on the 7 steps to put a budget together go HERE.
Other dials on your business dashboard should represent the other areas of your business and how you can measure whether things are on track. Imagine your business is much bigger than it is now. You are travelling overseas for 4 months and you check in with head office every couple of weeks to see how things are going. What specific measures would give you the information you need to see if things are running well….or running rough? In your Sales department you might like to know the Conversion Rate of leads into quotes and then quotes into sales. In the Marketing department you might like to know the number of leads coming in and what Lead Generation tactics are working best. In your Operations department, apart from Gross Profit, you might want a measure of quality, such as inspection failure rate and maybe Work In Progress. In your Finance department I would suggest average debtor days, free working capital and Net Profit. Not a huge list, but a range of relevant and up-to-date figures that give you a snapshot of where you are at and also how you are trending over time. There are many other measures available – it is just a matter of deciding the most relevant for your particular business. With this knowledge you will increase your feelings of confidence and control and be able to support your decisions with some objective measures.
No more flying by the seat of your pants.
So, what are the key areas of your business that you would like to have more up to the minute information on? Do you have some SPECIFIC targets you are aiming at on an annual basis? Put some measuring processes in place and then get in the habit of looking at the numbers on a regular basis so you can better control your business and therefore your life. Need help to do this? Give me a call or email me at andy@tradescoach.co.nz