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Edition 55 – N is for Numbers

Not knowing the numbers falls a very close second to not having a direction for most family businesses. Personally, I find that astounding given the advent of mass computerisation in most businesses over the past 30 years. The uptake of MYOB, Quicken and Xero has changed the face of financial reporting for most businesses. Well, should have at least.

Essentially, there are three sets of numbers that your family business needs to focus on:

  1. What the Key Business Drivers are?
  2. What the Key Performance Indicators are?
  3. What the Key Target Numbers are?

Key Business Drivers are all about activity. What is the activity that needs to take place inside of your family business that generates the result that you are after? Generally, there are 7 to 12 Key Business Drivers for every family business. To work out what they are, you need to fully understand and appreciate your business process. To do that, you need to start with the end result, then work back. So, if profit is your end result.

  1. What activity is driving that profit? Let’s say it is sales?
  2. What activity is driving sales? It might be the level of enquiry and the rate of conversion?
  3. What is driving the level of enquiry? It might be how many tenders you submit?
  4. What is driving the rate of conversion? It might be how good you are at selling?
  5. What is driving the number of opportunities you are chasing? It might be how many times you are in front of people telling them how you can help them.

Once you have your Key Business Drivers in place, you then need to focus on Key Performance Indicators. This is where you need to understand:

  1. What it costs to produce a product or service?
  2. What the capacity is in your business to take on more work?
  3. How long it takes you to get something to market?
  4. How far out your order book needs to be vs. how much the market is willing to wait.
  5. If you tweak a number (up or down), what impact that will have on the results that you can generate in your business.

Finally, there are Key Target Numbers. Ostensibly, this is driven by the Budget process. It is all about what the headline numbers need to be to generate the results you are looking for. So, this is all about, amongst other things:

  1. Revenues – split amongst the various categories.
  2. The direct cost of generating those revenues.
  3. Your overheads.
  4. The desired net profit result.
  5. How much cash you need to generate to keep the business funded daily.
  6. The amount of bank funding you need to implement the longer term strategic direction of the business.

Too often, businesses that look at their numbers on a regular basis only look at the top line (revenue) and the bottom line (profit or loss). Operating a business in the new world is more sophisticated than that, and most family businesses have this information available in their in-house financial reporting systems, or some other computerised system. It’s just they:

  1. Don’t set it up properly.
  2. Don’t understand how the system works.
  3. Feel they are too busy to devote time to it.
  4. Don’t understand what the numbers truly mean.
  5. Or, couldn’t be bothered!

Knowing what your Key Business Drivers, Key Performance Indicators and Key Target Numbers are for your family business is critical to success in family business.

This Week’s Tip

Numbers are numbers until you drill down on them. Then they are reasons.