Nothing is more dangerous than a Finance Leader who thinks the answers lie in the numbers.
But there’s nothing more sad than a Business Leader who thinks the numbers will not help them find the answers.
While spreadsheets, dashboards and analysis are insufficient to manage a business, data-driven decisions can help you grow faster.
Plus, the numbers are yours and available. Treat them like another asset—a tool to help you grow!
Here are some examples that we see of data that helps decisions:
Loss Leaders
Too often, clients have a product or service that doesn’t make them much money.
If you manage the organization with numbers alone, you’d kill the product or service! A low or negative gross margin leads to little profit on the bottom line.
However, there are many reasons why a business would want to maintain its loss leaders. Here are just two.
– They can be “wedge” products or services introducing the company’s value to new clients.
– They can be “brand anchors” that bring creditability to the organization or tie to the value they are known for providing to the community.
There are no black-and-white answers in business. It may make sense to discontinue a loss leader, change your approach or set a “ceiling.” For example, could you maintain brand power if you sold 100 a month, had scarcity, and didn’t incur the costs and losses of the next 900? Or, if the loss leader is already succeeding at introducing you to new customers and supporting your reputation, could you reallocate marketing away from that product and service?
Forecast
There’s nothing worse than a Business Leader who throws a plan in the face of the team without evidence that they understand the current state and what’s changed with the market, team and learnings since.
Oh wait – there is! A Finance Leader who harps about the original budget or plan is likely more awful.
But here’s the thing: Having a forecast is critical to a material decision. Understanding the cash flow timing of your capital assets, collections, payroll, marketing, and other expenditures can make a big difference in approaching an opportunity.
Once a decision is made, using the budget can help you keep ahead of costs and cash inflows and outflows. It can ensure you are focused on continuous learning and tweaking the plan to fit the feedback from the market, the team’s experiences, and the opportunities and restraints you encounter.
We’ve learned that people avoid forecasting their ideas and budgeting their decisions for several reasons.
Finance Leaders fail when they push back because they don’t feel they have the information to make it accurate. Or they can see the numbers so clearly they don’t see why it needs the effort of putting it on paper.
The latter (or both) can be true for Business Leaders, too, but the most common reason is accountability. They don’t want to be measured or questioned about the results.
They are not wrong to be hesitant. Businesses use budgets and forecasts in ways that drive perfectionism and sensitivity. But there’s an easy way to break these barriers. Use the budget and forecast as part of an action plan. Rather than over-rotating on defensiveness and variances, use it as a tool to take action. Forward-thinking decisions, trends, and analysis will provide value and buy-in. Don’t worry about why the plan was wrong; focus on the leanings and what to do to go forward instead.
Read more on Budgeting.
Can You Afford It
Use Key Performance Indicators (KPIs) to help drive behavior and to ensure you can pay for the commitments. We spend money in business to grow and earn revenue and profit. If an investment makes sense, it will have a return.
We can have more confidence in our decisions if we use numbers and set KPIs that eventually lead to profit and revenue. We can see a path towards the cash flow to fund the decisions and investments.
Financial KPIs can be lagging indicators, meaning they are measured afterward and give you historical data. That’s an issue, and KPIs need to be iterative and balanced. Leading indicators are often based more on actions and what is being done. The audit trail for these KPIs is usually weaker because wrong input and insufficient data result in lousy output and bad measurements.
Combining leading and lagging financial metrics can help you promptly spot trends, challenges, and opportunities. Most importantly, we need to take action based on that measurement. For example, suppose gross margins are off on a project or service. In that case, you can look at your work in progress, invoice more earned revenue or sell more, manage labor and the team’s time or make other vital tweaks or further analysis to ensure you gain the margin and ultimately profit as intended.
A culture that uses KPIs will take the inputs more seriously and meet expectations of timeliness and accuracy. A great place to start is with financial data—share, use, and discuss it.
Don’t act like showing your numbers is as scary as getting naked. Normalize it!
Those are three quick ways to use numbers. There are endless others, including compliance, financial reporting, diligence, cash flow management, operational excellence, etc.
Start somewhere. What numbers do you have? What consistent and disciplined practice could you put in place that uses them, helps your decision-makers and grows your business?
Interested in learning more?
Contact Us
Watch our LETs episode on Navigating Business.
Get the latest on business leadership delivered to your inbox every week!
Leave A Comment
You must be logged in to post a comment.