Are You Watching the Wrong Business Metric?
We’re almost at the end of the first quarter. So, the smart businesses are beginning to look at their revenue to see if they’re on target for the year or not. Are you going to make it?
While revenue is a good past performance indicator it is not a predictor of things to come. Too often I see business owners watching their revenue and getting frustrated because they don’t know how to fix the problem.
Most business owners are getting advice and council from their accountant, which they should. But, an accountant only can tell them what happened. The good ones can even tell you what’s causing the problem. But, the can only tell you in a general sense where to focus. For example, “fix your sale, fix your throughput, fix your marketing” etc.
While it point you in the right direction, what do you do next? The problem with watching revenue and other financial indicators is they show you what happened. Now you’re left to react to a problem instead of preventing it from occurring in the first place.
Using Metrics to Predictive What Will Happen!
Ok, so how do you predict what will happen in your business? Easy, understand the cause and effect of your operation!
I have been teaching businesses to do this for nearly 2 decades. Then back in 2004 I create the revenue engine model to simplify this process to a level that a high school student could use it!
You can watch the video below to get a quick understanding of the concept of the model and how it applies.
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Now let’s see how this approach allows you to be more predictive in your business.
Let’s begin by looking at your revenue from your financials. Is it too low, too high, or just right? If it’s too low, then let’s use the model to see why.
If there isn’t enough revenue most people jump to the conclusion that there aren’t enough sales. While this may be true, you first need to know how many more sales your operation can handle!
I have a manufacturing client I am working with that wants to grow their revenue. So, I asked how much capacity do you have in the factory? They said we’re nearly at capacity now. Well, how can you sell more if you can’t fill the orders!!! The light bulb went on and we put a plan together to add capacity.
Do you see how this approach is predictive? If you watched the video you know that we work the operational cycle backward. So, you need to know what you have to work with before you begin building a sales plan.
If you do have capacity, then we would look at sales. How do we fill the capacity that is sitting ideal? And then we look at how much more marketing is needed to generate the leads to increase sales.
Now, if you follow the process as it is laid out here do you see what you’ve created? You’ve defined the targets all along your revenue cycle.
Now, you can monitor day-to-day, week-to-week, month-to-month if you are hitting your marketing targets. If not, guess what, at some point down the road your revenue will be down.
But do you see, using this approach allows you to see it before it happens. Now, you can proactively do something about it.
A service client several years back used the method to predict their operation. We would see the indicators for his business go down and ask the questions ahead of time. Then put a quick plan in place to get the numbers back up. Within weeks he would see things turn back upward and never see the downward result on his P&L! Wouldn’t you like that kind of management control over your business.
This is part of our High Impact Busness Planning Process. You can applied our process to your planning in a variety of ways. Click to find out more about how you can use this process to more profitably manage your business no matter where you are in your business growth or what time of the year.