by MHolland | Jan 11, 2024 | Business Tips
To fly a large jetliner a pilot needs more than 3-4 indicators to get you safely to your destination…
You are about to board a flight. It is a large Boeing 747. You glance inside the cockpit. (Okay, okay, imagine it is pre-9/11).
You see the pilot has taped over all the dozens and dozens of gauges, lights, and dials. There are only three he is focused on.
What do you do?
You turn on your heels and rapidly exit the aircraft.
Running a Business is Like Flying a Plane
A business is much like flying an airliner. A businessperson needs more than a few financial indicators.
The challenge with financial indicators (and they are, of course, critically vital) is that they are the measurement of a result. And you cannot change the result; it is too late.
Activities that we measure that have an impact on the result you desire are called Leading Indicators. They are like advance warning signals of things to come. You can take corrective actions to change them, and the results – hopefully – will change.
A Business Example
Now, let us look at a business example….
You have a goal for a certain sales target.
To keep it simple, we will look at four Key Performance Indicators that are Leading Indicators to reach your goal. We will choose one from each of four areas of your business – (1) Finance, (2) Operations, (3) Customers, and (4) Team.
Number One (Finance Area) is repeat business. How often, on average, do your customers come back each month.
Number Two (Operations area) is on-time delivery. This will be a powerful leading indicator of how well you are doing and may impact sales volume.
Number Three (Customer Area) is customer satisfaction as measured by customer surveys after each transaction. If the score is high this will have an impact on the number of referrals you will receive, as well as repeat business.
Number Four (Team Area) are employee satisfaction surveys measured weekly. An unhappy Team may lead to unhappy customers and thus lower sales.
Of course, one of your KPIs is sales, yet this is a Lagging, or results based, KPI. You can stare at your sales figures all day long and yet not know what to do to make them grow. To do that you need to track the key activities that are impacting sales.
How Many KPIs Should You Track?
A paper published in 1956 was called “The Magical Number Seven, Plus or Minus Two” talked about the limitations of the human brain to contain and process more than seven bits of data.
Well, since 1956 we have had Executive/Business Dashboards. We do not need to contain in our head all the business KPIs we may be measuring.
Okay, so what is the “right” number. Current thinking is somewhere between ten and twenty. This is more than the seven as written about in 1956, yet not so many that you cannot make informed decisions to attain your business goals.
Four Main Areas for Your Key Performance Indicators
As mentioned above your business KPIs should be grouped into four main categories – (1) Finance, (2) Customers, (3) Operations, and (4) Learning/Growth (or Team).
About 3-4 per grouping is enough, with a few more in the financial area. You will track both Leading and Lagging Indicators.
Here are some examples you can track:
- Financial
- Sales and Gross Profit by Product Line (tells you what products/product lines are the most profitable)
- Break-Even Sales (total sales required to cover all your fixed costs plus a profit)
- Days to collect receivables on average (measures efficiency of converting sales on credit to cash)
- Cash-Flow (where did cash come from and what was it used for)
- Days in inventory on average (measures how quickly inventory is converted to cash)
- Return on Equity
- Current Ratio (measures liquidity)
- Customers
- Conversion rate (percentage of leads converted to customers)
- Customer satisfaction score (how customers rate you will be a major leading indicator of future results)
- Referral rate (are new customers coming from referrals – the best source for new business)
- Average transactions per customer (repeat business is the lowest cost for new business, as it is existing customers who are coming back to buy more)
- Average sale per customer (the amount people pay on average per sales transaction)
- Operations
- On-time deliveries (leading indicator of future results)
- Error rate for a manufacturer (will cause customer problems, or higher costs per transaction)
- Machine Output per machine (down time will result in lower sales)
- Productivity per Team Member (higher costs per transaction arise when productivity is low)
- Percentage of wages to sales (a leading indicator of possible lower productivity or sales volume issues)
- Team
- Team satisfaction scores (as measured by check out forms done weekly)
- Team turnover
- Education/training costs invested per employee.
- Ranking of Team members by customers
You Get What You Measure
Remember, you get what you measure. If you choose the wrong things, you might get the wrong result.
Here is an example. Let us say you want higher sales. However, your mission statement is to fulfill on what your customers want and maintain them for life.
What you measure is the average sales value per salesperson. And you reward them for their results. Higher average sales mean higher commissions and bonuses.
Your salespeople may end up pushing sales on your customers that work in the short term, yet have the customer feeling used and unappreciated, and they might leave. This obviously works against your Mission Statement.
Attach a Key Performance to a Team Member
Each KPI must be owned by a Team Leader and each person on her/his Team. Holding people accountable for their numbers will make the KPI an active measure, not passively watched by the company with no actions taken.
Here is an example. In the trucking industry it is common to have greater than 100% turnover of truckers.
Wow! Imagine that? How do they cope?
Let us say you have a human resource manager responsible for the truckers in a company that has historically experienced 90% turnover.
You give her a Target KPI of 70% turnover. She will be evaluated and rewarded on her ability to attain this 70% KPI.
What is she now thinking about all the time?
How to motivate her truckers to keep them happy and employed with this company. This consumes her thinking all day. And her actions will line up with things that will make her truckers stay and not want to leave.
Of course, she will have a budget to work with as well. (This is how you manage conflicting motivations, or she could overspend to attain her goal of 70% or less turnover.)
Summary
Think about what your goals are for the next 1-3 years. Create KPIs that will help you define and act on problems before the problem becomes too big or chronic.
Delegate the ownership of those KPIs to individual managers in your company.
Track your results weekly in some cases and monthly for others.
Meet with your Team to discuss the numbers and take corrective action.
Make sure you have many Leading Indicators so that corrective action can be taken quickly.
Thanks for reading…
** This blog is based on the thinking of a book called The Balanced Scorecard by Robert Kaplan and David Norton
by MHolland | Jan 5, 2024 | Selling Tips
These are tough times for small and medium sized businesses…
People have less cash to spend (more money is going to cover basics like food, fuel, and mortgage payments).
Credit for small businesses is either not available or unaffordable with exploding interest rates.
What to do?
Batten down the hatches and trim expenses? Hang on until the wave passes and then come up for air?
How about going the other way? What about investing in soft skills for your team?
Awesome Service Training
Many businesspeople I talk to about investing in soft skill training for their Teams resist it in one of 3 ways:
- They say, “we already do awesome service. We do not need it”.
- They mistakenly do not make the connection between soft skills training and hard-core business results.
- They do not see it as relevant to their business, or their industry.
First, before we get into these three objections, what exactly are soft skills?
Soft skills are training that embed Performance Standards for your Team in the service aspect of your business.
And, every business has a service aspect, even if you sell manufactured goods.
They are things like:
- How many rings before you answer the phone?
- What is the first thing every customer hears/reads when you answer the phone, enter the shop, read an email? Is it consistent, kind, filled with softeners?
Softeners
Soft skills are well named. They are often words, or scripts that soften what is otherwise harsh, cold basic business language.
Even greetings like “good morning, good afternoon, or even hello” can be considered softeners. “By the way”, “I was wondering if…”, “do you mind if a put you on hold?”, “thank you for your patience” are a few other softening phrases.
Even punctuation marks like “…”, or a comma instead of a period can serve as sentence softeners.
Can you feel the difference between these two as an example –
Thank you,
Thank you.
Softeners in speech, emails, and phone calls can act like the honey that sweetens the harsh, cold words of language.
Is it less efficient? Yes.
It takes more time in speaking, writing, and on the phone.
Recently a business associate sent an email to one of my Team members.
It had no hello, no good morning, no greeting, no name, nothing.
It consisted solely of 5 words:
“What the heck is ____?”
This was the first email ever received from this person.
It was more efficient, yes. However, it occurs as a little abrasive and rude.
And this is another mistake people make. It is a big one. They think it is okay to speak rudely to their internal Team and then pour on the sugar for outside customers.
No, no, no.
How you do one thing is how you do everything. Customers will one day overhear rude language to internal Team members. This makes them immediately suspicious of the motives of the company’s external politeness.
Soft Skills Equals Hard Core Results
We all know that soft skills equal hard-core results. We know this is true. How?
Because we as consumers are always shopping with our wallet. Especially when it comes to eating out.
Take two restaurants with the same quality food. One place has awesome, genuinely caring, consistent service from the time you enter to the moment you leave.
The other one may have slightly better food. I would assert that the first place will have more repeat business, a higher average sale, more referrals, and more profit than the second one.
More than any other factor people come back to a business when they feel that you genuinely care for them. To demonstrate that you authentically care for your customers, you must have Performance Standards that consistently show that you do care for them. It cannot be a “once in a while” experience.
Performance Standards in action also must be done for their own end, not to get more sales, or a higher average sale.
Your customers will smell the insincerity.
Awesome service Performance Standards must be done because:
- It is the right thing to do.
- They make you feel great.
- They make your customers feel great (even if they do not come back).
Okay, let us go through the objections people have for implementing soft skills training….
Number One Objection – “We Already Provide Awesome Service. We Do Not Need It”
Does your company have documented Performance Standards for all areas of your business where customers engage with you?
If no, then I would assert that it would be impossible to create consistent wow factors for your business.
Consistency also means that the standards are the same regardless of which Team Member is serving a customer.
They are the same every day in every interaction.
When not, you can create additional Performance Standards for dealing with the break-down in a way that leaves the customer impressed with how you handled it.
Your Performance Standards cover:
- How you respond to emails (timeliness, tone, content, follow-up).
- How you greet customers when they come into your store or shop.
- How clean your store, shop and bathrooms are.
- How you answer the phone, the scripts on the phone, and how you end the call.
- In short, every single what we call “moment of truth” is designed in such a way as to leave your customers feeling cared for, served, even wowed.
Number Two Objection – No Connection Between Soft Skills Training and Hard-Core Business Results
The way to prove that soft skills lead to hard core results is simply to measure the impact over the first quarter after implementing an awesome service skills training. (This should be the first quarter after the results are embedded in your Team).
I would assert that you should see more repeat business, more referrals, and a higher average sale per transaction.
And it is important to measure those three things; however, that is a topic for another blog.
I know of a regional Australian airline that implemented an awesome service phone training a few years ago. In the first year after that training, they saw an increase of $21 million in sales. Pretty hard-core results, wouldn’t you agree?
Number Three Objection – My Business is Special, Unique
Many businesspeople I talk with are victims of magical thinking.
They believe that there is some brilliant, unique formula that will produce great results in their business.
Awesome service Performance Standards just seem too basic, too elementary for their “complex” and unique business.
Yet, I repeat, again – what has you return to a particular restaurant, hotel, shop, online business? Is it solely price? Is it solely the product?
No, it is the before you become a customer experience, it is when you are buying the service or product experience, and it is after the transaction is complete experience – i.e., the follow-up.
Every single business and organization on the planet wrap their product or service in some kind of service delivery mechanism.
Without Performance Standards It will be ad hoc, unplanned, unscripted…which means your customer’s experience will be different every time. It will change depending on the day, the person, the branch. Or even non-existent.
By delivering your product or service inside well trained and consistently applied Awesome Service Performance Standards you will almost be guaranteed of increased sales, repeat business, and higher cash-flow and profits. That is on the condition that your products are very good quality or above standard.
Thank you for reading…
by MHolland | Jan 6, 2022 | Cloud-based Accounting
As I have written before, cloud-based accounting is a system. You must have a systems mindset to manage it.
Working with cloud-based accounting software is like turning on a firehose of data.
Bank feeds. Credit card feeds. Shopify orders. Document feeds. Plooto feeds (do not worry I will explain!)
The power of cloud-based accounting is this – data from multiple sources can feed into your accounting software.
Why is that good?
It saves your team time. Accounting becomes dynamic, happening in real-time. No clerks entering debits and credits transaction by transaction at discrete times during the month.
And herein lies a problem my friends. Two problems to be precise.
With cloud-based accounting, documents flow into your software without human intervention. Hundreds, thousands if you are a bigger company.
If those systems are not managed or understood a big mess can get created! It is the old cliché, garbage in, garbage out. Except now the garbage is flying in at lightning speed one document after another.
This can be challenging to unravel. And time consuming.
There are three things you must do to manage cloud-based accounting…
Number One – Set-Up Your Systems Correctly
You must design your systems elegantly. You must understand how information flows into your software and how to manage it, in real-time.
For example, when you set up bank feeds your software will (in the background, usually daily) log in to your bank and pull your banking transactions into your accounting software.
It will look for matches to transactions you have entered. When it finds a match, it will suggest you click “ok” to reconcile.
It is important to ensure that the systems of matching are aligned with the actual transactions entered.
This is one system.
You may have invoices being synced from an online shopping system, like Shopify.
Here, if you do not have the syncing setup correctly your inventory, sales tax reporting, accounts receivable, sales orders…pretty much everything…. could end up being a mess.
Number Two – Manage Your Systems
It is imperative that you have a highly focused technician, who understands software to manage the systems.
You will have transactions flowing into your software from various sources (feeds). However, you cannot assume that the transactions are correct. Some transactions can be pre-set to always be posted in the same way. That is fine.
An example would be fixed rent. The rent you pay to the landlord is always the same and will always get posted to the same account. You can set up a transaction like this to flow in without any human intervention.
Does the same apply to telephone bills? You can setup your system to fetch the bill from your phone provider (log in the phone provider and post the transaction). It can be setup for auto pay.
But wait, stop. What if the bill is wrong? What is the phone provider charged you $500 for something you did not use?
You will want your sharp technician to check exceptions to the rules and flag them for review.
Number Three – Technicians Must be Trained in Accounting
It may seem like, with cloud accounting, that you do not need to know how accounting works!
This is not true. Cloud accounting is still accounting. Every transaction in accounting has at least two sides.
For every event in accounting, at least two (often quite a few) things happen. Every single transaction has two sides. There is no such thing as a one-sided transaction in accounting.
Take a sale. You sell a product. What happens?
Someone now owes you something. Accounts receivable has gone up. Sales has gone up.
Taxes were involved, so taxes went up.
Your inventory went down, and at the same time, Cost of Goods Sold went up.
All these debits and credits must balance.
Debits and credits can be very confusing to non-accountants.
Therefore, your accounting technicians must understand basic accounting and how each transaction changes various accounts on your Balance Sheet and Income Statement.
A systems driven person, not understanding basic bookkeeping, will not see the background entries being done by the software.
The problem emerges when you need to unravel a mess.
In Conclusion
Cloud accounting is fast. It is a system. To manage correctly you need to have it managed by people who understand software, systems, and basic bookkeeping.
With one of those three ingredients missing, a mess can emerge.
Thanks for reading…
by MHolland | Nov 25, 2021 | Business Tips
A man I trust (he has been right so often) predicts we may have about two more fat years. Followed by six lean years.
Fat years? Fat years? Yikes, imagine what the lean years will look like!
These past 19 months have been brutal on businesses. Restaurants. Pubs. Airlines. Travel agents. They have been pummeled.
What is the one thing that people do – most often – when things are going great?
They assume the sun will always shine, and they spend more.
This is the worst thing that any business owner can do when times are rockin’ is to add to their fixed costs.
There are six things you can do to thrive during tough times.
Keep Your Fixed Costs Tight
The first thing to do when times are good is keep fixed costs tight.
Go through all your operating expenses and ask which ones are discretionary versus fixed.
What is the difference between the two? Let me explain…
A discretionary cost is something like advertising. Unless you are locked into advertising contracts you can often turn advertising costs on or off.
Rent as part of a lease is often fixed and cannot be turned on or off.
Some wages may be fixed and some not. If you have long-term employees, it would be difficult to just shut them out without severance pay which could be high.
With all your discretionary costs separated from your fixed costs…
Work Out Your New Break-Even Sales
Take your total fixed costs from above and divide the number by your Gross Margin percentage.
Your Gross Margin percentage is calculated by first subtracting your total Cost of Goods Sold from your total Sales. That number is called your Gross Profit. Divide your Gross Profit by your total Sales to get your Gross Margin %.
Here is an example – your Cost of Goods Sold is $30,000. Your Sales are $50,000. Subtracting $30,000 from $50,000 you get $20,000. When you divide $20,000 by $50,000 you get 40%.
Based on your calculation above you determine your bare bones fixed costs are $60,000.
Taking $60,000 and dividing by 40% you get $150,000. That is what your break-even sales must be.
Next, ask yourself this…
Can I Raise my Prices?
In a tough market you will need to be careful raising prices. Is there something of value you can add? Can you add something that would cost less than the price increase people would be willing to pay?
A price increase – with no loss in sales volume – goes directly to the bottom line.
If price increases are not possible, look to….
Bundling
Can you bundle together other products or services to increase your average sales per customer?
Can you add services to a product that were never added before? An example here would be installation services for electrical products.
Restaurants during Covid use delivery services, like Skip the Dishes, to maintain sales.
Learn to Live on Less
My friend says we have two lean years left before 6 years of famine. These two fat years are anything but fat for most businesses.
Now is the time to eliminate debt, and save, save, save. Live on less.
Bring Supply Chains in Close if Possible
In the West we have become very depdendent on Asia (China, Korea, Viet Nam, India) for manufacturing.
With supply chains being broken in 2021, ask yourself if you can find a supplier within Canada or the USA. If you manufacture, can you start the process of bringing your manufacturing back to Canada/USA?
In Summary
Six things to do over the next 2 years:
- Lower your fixed costs
- Know your break-even sales. (This goes down as your fixed costs are lowered)
- Raise prices by adding value
- Bundle services and products to increase your average sale
- Cut personal expenses. Live on less.
- Bring manufacturing home
Thanks for reading…
by MHolland | Jul 8, 2021 | Accounting Software
Many readers of my blog know I am on a bit of a rant about all-in-one software… I promise that today I will only spout an itsy-bitsy rant. (And it will not be until way down near the end)! Manufacturing companies comes in all shapes and sizes.
Type 1 – Full In-House Manufacturers
The first are those ones who control all aspects of their processes internally. They buy raw materials, and they produce finished goods. There is a labour component and a manufacturing overhead component. They need a production scheduling software that manages labour and raw materials. They need a production scheduler and planner. The most complex production and accounting challenges emerge from these companies.
Type 2 – Production is Partially Outsourced
The next grouping are those who outsource part of the production to an outsourced manufacturing supplier/partner. They essentially assemble the finished goods. They are less labour intensive than the first type. They would likely not need a complex production scheduler component as part of their software requirements.
Type 3 – All Production is Outsourced
The 3rd group are those that outsource pretty much all the work to a partner and buy back the finished goods. Think Canadian and USA manufacturers who outsource production to a Chinese company/Partner.
A Few Examples
Imagine a company making organic food from scratch. They process raw materials into finished goods. There is a production team in-house. There is an internal labour component built into the finished product. There are labour variances and material variances. What is a variance? It is the difference between what you expect something will cost to make a finished good and what it actually costs you. You will start with a recipe of exact amounts of each ingredient, plus the labour cost, plus an applied manufacturing overhead cost. When you start a production run of a batch of product you expect to get an exact amount of finished product from a recipe of raw materials and labour. The reality is that it will not always go the way you plan. Your production team was either more efficient or less efficient. If more efficient, you will have a positive variance. This means it cost you less to make the product than you planned for. If you are inefficient it could be for a number of reasons. Raw material costs may have been higher than planned. You may have used more quantities than planned. The same goes for the labour component.
Choosing the Right Software
When you pick software for your business you want to pick one with the right features for you. For simpler manufacturing operations – ones that do not need complex production scheduling – Unleashed Inventory software is a great choice! It allows for many features you need without the extra complexity. You can track batches (critically important for food manufacturers). You can track serial numbers – vital for computer sales, as an example. Unleashed (great name, eh?) will allow for recipe creation (technically called your Bill of Materials) as well. What is does not have is extensive production scheduling for labour and raw materials. For that you will need MRPEasy. It is an amazing software that offers in-depth production scheduling for a full-service, in-house manufacturer. Both these awesome mid-tier cloud-based software programs sync beautifully to Xero or Quickbooks Online.
In Summary
Now, for my small rant. The people that designed these awesome, extremely focused software programs for manufacturers knew their limits. They did not keep going and add elaborate accounting modules. Why not? Because accounting for them – like for you – is not their area of expertise. They smartly created a link to software that does accounting better than they ever could. Together you get the best of both. If you need help choosing which software is best for you, message me on LinkedIn. Thanks for reading…
