Simon Pinion, Business Advisory Partner, looks at the key input and growth drivers needed to keep your business moving forward.
Those of you who have read Lewis Caroll’s book, ‘Alice in Wonderland’ (or ‘Alice’s Adventures Under Ground’ as it was originally entitled) might recognise this extract from the conversation between Alice and the Cheshire Cat:
“Would you tell me, please, which way I ought to go from here?” asked Alice
”That depends a good deal on where you want to get to,” said the Cat
“I don’t much care where,” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
What’s this got to do with business owners and their business?
If they genuinely don’t care what happens to them, their business or loved ones now or in the future, this might be OK. But for everyone else, with people depending on them, with employees and their families, customers and suppliers, all of whom will be negatively impacted if the business fails, they really do need a plan for where they want to be in the future, in both their professional and their personal lives, and they need to be clear on when and how they want to get there.
The vast majority of businesses purely focus on lag measures, in other words, what has happened. This means that their reports look at outputs, what was sold, profit and how much cash there is in the bank. Looking backwards rather than forwards means that attention is focused on what is, for most businesses, now ancient historywhich is not helpful for effective management control. In this article, I am focusing on lead measures, input drivers, and the critical business growth drivers you need to understand, measure and review on a regular basis to help you map out your business journey.
So what are the lead measures, the business growth drivers, that we should focus on? There are some things that apply to all businesses; the terms may differ slightly, but the fundamentals remain the same:
- New customer acquisition
- Customer engagement
- Gross profit margin
- Average purchase frequency
- Average purchase value
- Overhead optimisation
- Cash flow
Every business is different, but they will all need to decide where to focus most of their attention, or choose to focus on all of them, and work to make small incremental gains.
New Customer Acquisition
New customer acquisition is key to long term growth, the ability to acquire new customers and retain them long term. This requires planning and rarely just happens, so you will need to consider who your ideal customer is, which media they use (and when) so you can reach them. This will allow you to design your engagement process to engage and convert your ideal customer to become a highly valued, loyal client that will refer back to you in volume again and again.
It is important to remember that it costs much less to retain your existing customers than it does to acquire new ones.
A business will need to consider how improving customer engagement can lead to increased loyalty, higher sales and more referrals. The best source of new customers is often by referral from your existing engaged and happy customer base. Small improvements in customer retention can significantly increase long term growth of revenue, profits and cash.
Gross Profit Margin
Profit margins can be improved by controlling costs and increasing prices. Good customer engagement can mean that price becomes less important which then allows price increases to become much easier to achieve. It is important a business uses current management information to identify opportunities and avoid loss of margin. Reporting on staff productivity can identify inefficiencies and underutilised staff that can be improved to increase margin and profitability. At the same time, the sales team needs to be educated to understand that discounting, whilst improving revenue, may well have a negative impact on profit and cash flow. Higher profit margins require a business to monitor their profitability drivers and identify areas for improvement.
Average Purchase Frequency
To increase revenue, a business needs to focus on increasing average transaction numbers and values. You can’t manage what you don’t measure, and therefore it is vital that management information continually measures this. It is also important that the sales teams own these numbers and work on continuous improvement. (There is often low hanging fruit that can be picked to help achieve quick and easy wins.) A business should agree on its goals for growth and to encourage improvements from all operational contributors, and then celebrate and reward success.
Overheads are the fixed costs of the business that are not directly attributable to revenue and activity, such as rent and utilities. Often the focus is on revenue and margins and it is easy for overheads to be overlooked and opportunities missed to keep them under control. Costs can be driven by external factors such as inflation, cost of labour, energy, rent and internet. They can also be influenced by internal factors, such as quality, innovation and waste reduction. Identifying the areas that can be improved, monitored and controlled should not be overlooked.
Last but definitely not least, cash is a business’s number one key performance indicator (KPI). It is the lifeblood of the business. Many small businesses focus on increasing turnover, without understanding the impact of it, or monitoring their cash flow. That can result in poor planning, increased discounting and poor productivity. And it can happen to any business, of any size:
‘We were always focused on our profit and loss statement, but cash flow wasn’t regularly discussed. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.’
Michael Dell, founder and CEO of Dell Technologies.
A business needs to be aware of the delay between buying and paying for stock and wages, and the time separating when the finished product is sold and when it is eventually paid for. As sales and revenue increase, cash typically flows out of the business faster than it flows in. It is important therefore a business understands this cycle and forecasts, monitors and controls it.
These are what we consider to be the 7 key drivers of growth, that every business should monitor, and analyse closely. By understanding these drivers and how they impact your business performance, you can make better strategic decisions and achieve your growth objections.
Your Scrutton Bland adviser can talk you through how we can use our reporting tools to capture, visualise, monitor and report these input drivers from your existing accounting data. We can then help you build a profit and cash forecast based on these drivers to achieve your desired growth and increase value within your business.
For more information on the business support we can offer, please contact Simon Pinion at email@example.com or phone him on 0330 058 6559.