Look, no one likes metrics at first.
Most people who get into small business ownership get into it for a passion, not to pore over numbers everyday.
But, you need to learn to love them.
You need to learn to love them for your sake and the sake of your business.
Learning your numbers and becoming obsessed with them will bring you clarity, sleep, less stress, and probably more profit.
Numbers are evidence. They’re evidence for making decisions about the future and they’re evidence about understanding the past. The clearer you can get on all of them, the more confident you’ll feel about both.
When looking at the current state of a business, my first question is always “what happened to make this happen?”
Here are the main areas of focus you need.
How long do clients work with you?
Imagine that you could, overnight, get the exact amount of clients you can ideally serve.
You can charge them the exact amount of money you want in order to live the life of your dreams. And you can annually increase their price in a way that helps you keep pace with inflation and your development as a professional. You never lose a single one and you get to work with them for the rest of your career.
Wouldn’t that be amazing?
Your worries would be infinitesimally small in comparison to where they are now. Certainly you’d have problems to solve, but I imagine they’d be way smaller than they are now.
Unfortunately, that might not be realistic. But is possible to strive for. I know plenty of service based businesses who have 99% of that. They have a full client list as well as a waiting list.
They can do this because they don’t lose a lot of clients.
This doesn’t just happen overnight. It takes a lot of focus and energy.
And that all starts with metrics.
It starts with understanding how many clients you lose every month.
Then understanding why you lose those clients every month.
Then understanding how long each of those people stayed with your business before they left.
All of these will help you understand where you need to focus.
If, after a thorough evaluation, you’re finding that a lot of your people leave between month 7 and 9 of working with your business, you need to dive deeply into what happens around that time period to make them stop feeling the value of what you’re providing.
You’ll also understand if you need to focus on this area at all.
If, after a thorough evaluation, you’re finding that you lose a handful of people every month due to circumstances entirely out of your control, you’ll be free to focus on other areas of your business, like sales and marketing.
In order to figure these things out, you’ll either have to utilize your membership management software or you’ll just have to do it manually if you don’t have that software.
2. Sales and Marketing
Whether it’s an increase in revenue or decrease in revenue, it’s important to understand the causal relationships so you can either do more or less of the things you were doing to get you here.
Let’s say, for example, that you’ve got your retention stuff all figured out. You lose a small percentage of people every month, and it’s relatively predictable. You now know how many people you need to sell to every single month.
If that’s the case and your new revenue is down for the month, it means you have a sales problem, a marketing problem or both.
This will beg further questions.
How many leads are you getting? How does that compare to normal months? How does that compare to your industry?
How many of those leads actually communicate with you in a meaningful way? How does that compare to normal months? How does that compare to your industry?
How many of those leads end up being presented to or shown your services? How does that compare to normal months? How does that compare to your industry?
How many of those clients say “yes”? How does that compare to normal months? How does that compare to your industry?
I’d imagine that the vast majority of small, service based businesses have absolutely no clue as to the specifics of any of those questions.
But you darn well should.
You should because you need evidence to make decisions on what to do.
If, for example, you’re having a down revenue month, and you start to get nervous about your pricing, thinking maybe that’s the reason you don’t have enough clients, so you start to drop your prices, hoping it’ll get more people, but in actuality, you just don’t have enough leads coming in, then you’ve essentially shot yourself in the foot for when you solve the real problem.
All of this, in essence, is further exacerbated by how distractible we are these days. We scroll through social media and are bombarded with talking heads telling us that they have the solution to our problems, when, in reality, they have no idea what our problems actually are.
So you hear, “I’ll show you the way to millions of dollars by using my super secret marketing strategy!”, so you go and sign up for the course, pay thousands of dollars for this super secret program, get thousands of leads coming in the doors, but your sales process sucks and your close rate is horrible, you’ll have completely just wasted your money and wasted opportunities.
On the flip side, there are few things that annoy me more than when someone has a massive month, but they don’t have any idea why.
While it’s fun to celebrate, and it’s amazing when it happens, when I follow up the champagne with “ok, now what caused this to happen?” And you have no clue, the fun will be short lived.
Once again, going back to the numbers, knowing what specific set of metrics changed in order to cause the success (and it has to be represented somewhere unless someone just started dropping bags of cash on their doorstep) will help do more of that in the future in order to continue that success.
If, previously, you had a ton of leads, and when you could get them to hear a presentation, you sell those leads, but you were only able to actually book a small percentage of those leads, but in this new upwardly trending month, you saw a massive increase in bookings, you’d explore exactly what happened to cause more people to book.
In order to do this, you’ll need to start tracking all of this.
If you don’t have software capable of this, create a spreadsheet for each month and create columns for, leads, consults and sales.
Leads should be anyone that inquires.
Consults should be meaningful, in-depth conversations or presentations that end up giving pricing information
Sales should be anyone that signs up and pays.
3. Monthly Profit and Loss
Imagine right now that you had an extra $3000 in your pocket or in your business. Would you find a good use for that?
At the same time, think through all of your monthly expenses, subscriptions and fees. Do you think you could find $250 worth of those per month that you could either cut or get a better return on?
I imagine you could, but only if you’re meticulous about tracking your expenses, which most people are not.
Well, if you spent the time to understand and meticulously comb through your expenses on a more frequent basis, I almost guarantee that you’ll come to find out that you’re needlessly or ineffectively spending money on stuff you don’t need, don’t use, or don’t get a sufficient ROI on to keep spending the money.
If you can skim off just $250/month, you’ll have an additional $3000 in your pocket every year.
Most people do the absolute minimum in terms of tracking their monthly financials. They reconcile their books once a month, quarter or year, assuming that if their accountant doesn’t yell at them, the IRS doesn’t come a knocking and they make payroll every month, that everything is all gravy.
I’m here to tell you that isn’t even close to enough.
You need to be in your accounting software everyday.
And that is the bare minimum.
Without paying close attention to all of those items, you’ll never understand what is happening inside your business and the only way you’ll uncover needless expenses is after several months of wasting that money, when the leak you’ve sprung is finally causing the water to rise high enough for you to see it.
On the other side of the equation, if you aren’t paying attention to your profits and the end result of what happens when you subtract your loss from your profit, you’ll always be flying by the seat of your pants, assuming that it’ll all be alright.
You’ll also never know if the money you’re expecting actually ever hits your account. (This one especially shocks me).
To do this, make it a habit to open your accounting software at least once a week, downloading and categorizing all of your transactions. Coordinate with your accountant to make sure you know where expenses should go.
4. Monthly Trends
Continuing on the Profit and Loss theme, the vast majority of people I encounter can’t understand, comprehend or take the time to recognize the trends that tend to happen within their businesses.
They don’t take the time to see what happened last year over the same time periods.
They don’t try to understand what has happened, is happening and what normally happens.
So they panic when things are slow, potentially axing staff, making cuts and losing sleep during months where it’s just normal for them to be slower.
Or, they overspend, over-hire, expand and get lazy when things are super busy. They assume the good times will never end, but when their normal seasonal drop happens, they’ve built an enormous vessel that is trying to sail in a bathtub.
Almost every business in existence has a busy period and a slow period, if not multiple.
By analyzing your profit and loss and comparing periods to previous years, you’ll understand the trends, make much better decisions and sleep better at night.
4. Bank Balance and Cash Flows
Do you know how much actual cash you made or lost last month?
I’m not talking about your salary or wages, I’m talking about how much money your bank account grew by last month?
How about this month? How much should you have in there at the end if you don’t make any more sales this month? If you make a reasonable amount of sales?
This seems like a relatively easy equation, but it’s often not. Because of fluctuating payrolls, expenses that occur at different times throughout the year, the unpredictability of sales and the fact that most people use a credit card for their business transactions, the balance of which isn’t due until the next month, makes for a surprisingly complicated matter.
The complication of this matter can make life really hard for you.
Will you have enough money to pay yourself, your fixed costs and your payroll next month?
Did you end up flush with cash at the end of last month, but also spent a lot last month on a credit card, meaning that next month will end up really lean?
Are you paying yourself too much? Not enough? Are you making enough cash? Too much cash that you’ll have to pay taxes on without a plan?
Do you have enough for those expenses that are coming up later in the year.?
Do you know the answers to these questions?
To figure all of this out, start tracking your monthly cash flows and paying attention to the projected upcoming debits and credits to your account.
I recommend a spreadsheet where you enter all accounts at the end of the month. Make sure it’s on the same day each month. The last day of the month works great.
5. Billing Software
Has everyone paid this month?
Has everyone’s payments gone through this month?
Has everyone’s payments deposited this month?
What payments are upcoming?
When will those deposit?
Do you have payment information from those people?
If not, when? How?
Those latter two are the ones I find the most confounding for people.
They probably know they got paid, but they don’t know when things are going to deposit.
Will that money get in before that next big bill or payroll is due?
Going back to the cashflow issue, these can really complicate things if you don’t stay on top of things.
To do this, do a quick audit of all of your transactions on a daily basis in order to understand the issues above and understand the projection of money that will or won’t be in your account at the end of the month.
6. Tax Planning
Do you know how much money you’re on track to owe to the IRS this year?
Have you been saving money or making deposits according to that projection?
Without getting too far into the tax planning conversation, the bottom line is that without an accurate and diligent tracking of your metrics for both what has happened in the current year and what you project will happen in the remainder of the year, you’ll be completely blind to what what you should be planning for.
Ideally, every quarter, you should be able to talk to your accountant about all of the above in order to make sure you’re on track for your taxes.
But you can’t do that without tracking your metrics.
To do this, assuming you’re now making it a habit to download all your transactions into your profit and loss on a weekly basis, all you need to do is get on the same page with your accountant. Get in touch with them every quarter and send them your profit and loss, and tell them what you expect to happen in the upcoming months according to last years trends.
7. Stress Testing
Look, no one wants to think about worst case scenarios (though I feel like most of use worry about them anyway), but with dedication and devotion to tracking and understanding your metrics, you can make very accurate plans for inevitable downturns.
If you know precisely what your monthly revenue and expenses are, you can easily create a document that will help you make a plan for the bad times.
All you need to do is create a series of columns in a spreadsheet. I create 5.
In each column, at the top, put “Current”, “-10%”, “-20%”, “-30%”, “-40%”. What you’re doing here is theorizing some hypothetical drops in revenue. You can do more than those, or you can do less.
Then, put your normal monthly revenue in the “Current” column. Put 10% less than that in the -10% column, etc.
On the far left, put each of your expenses from your Profit and Loss.
Underneath those on the far left, include any other payments that go out that might not be included on the profit and loss. These would be your pay, any loan repayments, and anything else you want to include.
Under the Current column, put your normal monthly expenses.
Under the rest, you now get to make a plan for the things you can and should eliminate under each circumstance.
There are likely things you can comfortably cut under tough times, and there are likely things you should cut last.
Obviously, under your worst case scenario, you’ll probably be cutting anything that isn’t absolutely necessary,.
At the end of the day, what you’ll likely realize is that your business can remain intact and cash flowing positively even under the worst of times.
That’s really freeing to know, and really empowering to plan for now.
But again, if you aren’t closely in touch with your metrics, you can’t do this exercise.
8. Cash Reserves
This is a topic that drives me crazy.
You’ll read about how you should have varying amounts of cash or liquidity in reserve for your business.
I’ve heard as little as one month and as much as six months.
I’ve heard payroll and owner pay should be included in this. I’ve also heard that it shouldn’t.
There’s absolutely no clear answer out there.
And at the end of the day, if you continue to hoard cash, you’ll have a really hard time taking advantage of opportunities or other investments because you’re always thinking you’ll need more cash to weather the bad times.
Now again, there’s a longer conversation that pertains to what this all means. Whether it’s actual cash, available credit or how much your organs are worth, theres more to it than just a number.
But in any case, if you’re closely tied in with your metrics, especially the stress test exercise mentioned previously, you should be able to recognize much more closely what you’ll actually need to have in reserve.
But if you just go off of a random number, you’ll always be chasing your tail.
Ok, so by now, you’ve had a lot of talk about numbers beaten into your head.
If you’re overwhelmed, that’s ok. Most people are, and that’s why most of them never even start. It’s a lot of elephant to eat, but if you go one bite at a time, you make it a part of your daily workflow, you will absolutely get better and better over time.
Eventually, you’ll know it all inside and out.
You’ll make better decisions.
You’ll understand the health of your business.
And perhaps most importantly you’ll sleep better at night.
Unsure on where to start?
I can help.