One of the biggest barriers to growth in the SME sector is business owners not knowing their numbers. The very numbers that they should be using to show what is and isn’t working in their business and to tell them where they should put more/ less focus and effort.
This however probably should not be any great surprise. Business metrics are not taught in school, unless of course you take Business Studies, and as a result millions of people start a business without any formal business training and are “batting blind” right from the outset.
Whilst the franchising model by its very nature does provide operational support to help to counter this, it can’t be stressed enough how important it is for every business owner to know the importance of understanding your numbers. If an owner doesn’t know what numbers they should be tracking and you add to this the perennial excuse of not having the time to study them regularly anyway or choosing to ignore them because they are afraid that what they might learn will be bad news, it’s not a great recipe for success.
Many SME owners chose their financial support (accountant, bookkeeper, on-line package) right at the start of their business journey based on price, rather than value. This is largely because either they don’t know what they don’t know in terms of the value that robust financial planning support can add to their business through things like management accounts, reporting, cash-flow forecasting et al. or they do know, but are not prepared to pay for it.
A lot of owners also view sales performance as being their priority and the numbers as being something their accountant does annually but, the reality is that the two are intrinsically linked.
By way of an example, here are ten numbers that will help any owner get a better handle on their past performance and start to plan what needs doing to improve results going forward.
Six require actionable strategies from you, as the business owner; the other four are bi-products of that action.
The Profit Growth Formula
(Number of existing clients X Retention ratio) +
(Number of qualified leads in the pipeline X Conversion ratio) = Number of clients
X
Average client spend per transaction X Number of transactions = Revenue
X
Cost ratio = Profit
Now, if you plug your numbers in for a given period, say 2024, it should show you the correlation between your leads, your clients numbers and your profit margin. That is step one.
Step two involves determining your targets. What do you want your profit to be? Put your desired profit figure down and work backwards through the formula using 2024 as a guide for what is possible, and it will give you targets for 2025.
Alternatively, you can simply identify what increase you can get from each area (for example, can you get your number of leads from X to Y?) and work through the formula to give a target profit level. Tweak until you have a suitable target.
Against each target you then need to ensure you have a clear set of actionable strategies to get from previous performance to desired goal. For example, what marketing strategies are you adopting to increase the number of leads from X to Y? what sales strategies are you going to use to increase your conversion ratio? what strategies are you adopting to increase spend / share of wallet per client etc.
I am sure you get the idea.
Most SME owners fixate on number of clients, revenue and profit. The reality is that these are bi-products of actions taken elsewhere.
It is a much better use of time and energy to fixate on your number of leads, your conversion ratio, your retention rate, the spend per transaction / client and your cost ratio. These are key numbers to help your understanding what is and isn’t working and where you should focus your effort and the strategies you adopt to maximise these will help you achieve the desired customers, revenue and profit.
In my experience, whilst robust financial forecasting is essential to business growth, it is only part of the equation. Understanding the activity required to achieve those forecasts and then having a realistic and trackable activity plan is the key to delivering on those financial forecasts.
Once you have a handle on your numbers and regular scheduled time to review them, you will never look back and your results will only ever improve.
Now that we have put the festive hangover and the January blues behind us, I wish you the best of luck mapping out your 2025 targets and the strategies to deliver the business success you are aiming for.
