Most entrepreneurs don’t rely on their FDs. Why? Because entrepreneurs aren’t usually steeped in high-level financial training.
And besides, the numbers the FDs produce normally come out too late to really influence key decisions.
That’s why so many successful entrepreneurs learn to develop their own key stats: the early-warning signs that tell you if all is well or a problem is afoot. If you get those right the rest of the numbers take care of themselves.
These magical numbers are different for each company. If you’re developing a technology product, then what is and isn’t working in the factory, on the test bed, at the beta site, is the highest priority.
But a successful entrepreneur will also use their favourite supplier or customer to tell them what’s what. They have come to learn that certain people and certain sources give them what they need.
Take manufacturing – your key stat could be how full the waste bin is after the afternoon shift. If you’re consumer-led, you must also have very fine-tuned consumer stats, covering awareness, penetration, satisfaction and returns.
Sounds obvious, doesn’t it? But it’s often only with bitter experience that one learns to recognise true performance indicators. Especially in fast-growing or changing businesses.
I’ve run a number of very successful businesses, but knowing your numbers is one of the lessons I’ve learned from the mistakes.
Once I was growing a new concept in used car retailing – car supermarkets. The business model was based on rapid stock turnover: vehicle price fluctuations were critical to profitability. We had targeted and achieved a 30-day stock-turn so we would be only one month exposed to price movements. Then the price of newly used cars fell an unprecedented 20 per cent in three months.
I should have seen it coming. What I hadn’t counted for – or monitored – was the price of cars at the places we sourced them from: the auctions. I had assumed that the 30-day stock-turn discipline would be sufficient. I should have had real-time systems in place, a terminal flashing daily buy-and-sell prices, rather than having to rely on hearsay from junior staff.
If a stat is that important, it has to be fresh – not hearsay or “delayedsay”!
When I talk to an entrepreneur who really knows their business, I never talk about the numbers you and I can see. I always ask them what are their five or 10 key numbers. The ones that keep them awake at night.
Of course you can’t afford to ignore profit and cashflow, but what drives and determines these final, historical figures are the output of a lot of other more important things.
So, when you’re working with your finance director, you must teach them how to capture your key stats – it may save your business one day!
First published in September 2004.