The ability to know how well your business is performing is key. I have never met a business owner who didn’t care about whether the business was performing or not. All business owners I know care deeply about this, and want this in their business analytics software. That said, understanding business performance is not necessarily a simple task. Growing a business takes effort and focus, but it is important to make sure that the effort and focus is spent on the right things.
We Are Selling More…That’s Good Right?
My experience in small and medium businesses is that, more often than not, Sales Dollars is the key metric. It is the one that everybody lives and dies by. Sales people, managers, and executives are almost always very keenly aware of what the sales numbers are.
I recall one sales executive at a company who religiously called every sales region on the last day of the month and ask “Where are we going to end up?” I don’t remember the question “Did we make any money this month?” ever being asked. It always struck me as odd. As a result, the company had a strategy wholly built around making the next sale. As a sales representative, whenever I asked for guidance on pricing, more often than not I was told, “just get the order”.
I realized years later that, whether by accident or design, this very sizeable company had built an entire culture that only cared about and understood top line sales. There were only a few people, less than 10% of the team, that had any idea about profit margin or cost. As a result, there was complete surprise in the organization when sales dollars went up, but profits plummeted.
What Drives Your Company?
Unless you are into currency exchange, you do not sell dollars. Sales dollars are an output. They are a the result of an invoicing activity. If you buy in to this concept, then you are probably asking yourself, “If sales dollars are the output, then what is the input?” GREAT QUESTION!
There are many ways this question can be answered. I typically find that the best way to answer it is to find the crossroads of the product or service and the way it is costed. That can often be used as the basis for tracking real growth. The important concept here is that your system of measurement needs a key element to be useful: context.
Developing Context for Business Analytics
The concept of context revolves around understanding what your customers are paying for. It also revolves around how that product moves and how different your products or services move to your customers. For instance, if you sell software as a service, your customers are paying for a subscription. Your real growth may be determined by the number of subscriptions sold. Alternatively, maybe the number of active subscriptions over a period of time is a better measure of sales & growth.
On the other hand, if you are a distributor, your customers are paying for some unit quantity of your products. That seems simple enough, but what if your products have a wide range of unit values, weights, and volumes? How do you maintain context over such a diverse group of items?
There are not always easy answers, but that does not mean it is impossible either. Some products within your offering may very well lend themselves to being tracked as a number of units. Alternatively, when you have a wide range of products that are all made from a common material type, steel for instance, you might be better off tracking those products by weight or in some cases volume.
This especially makes sense when the primary component of the product is a commodity that is sold by weight. Metals, plastics, petroleum, and other similar commodities would fall into this category. For instance, if one ton of your product has a value that fluctuates along a similar line as one ton of copper, then tracking your sales by tons might make a lot of sense.
Whatever unit you choose, it needs to be meaningful, and unaffected by changes in its monetary value. This will assure you can gain a clear insight on whether or not your business is growing.
Sales Dollars Lied To Me…
Once upon a time, I was working for a company where we were selling products that were made from primary metals. The prices were driven heavily by iron and steel, but there was a catch. The product also came in a number of different coatings, some of which were worth 35% of the total product cost.
One year, the company sold two windfall projects, both of which were specified to use the most expensive coating available. The project generated record amounts of revenue that year. However, the profits just didn’t come along with the revenue, and our vendors actually brought it to our attention that we were buying less product, putting our preferred pricing at risk.
On further review of our business analytics, we found that even though sales were going up, the number of units, and the tons of product we were selling had fallen off. Our sales volume had been super concentrated into two large customers, and was masking the fact that other customers were buying less, causing our real growth to backslide.
Don’t Get Fooled With Bad Business Analytics!
When designing business analytics for your company, be sure to understand the real drivers. Sales dollars are important, and they are meaningful, but they only tell a piece of the story. Getting the full picture on your company requires you to go deeper. Understanding real growth at the unit level, along with the sales price per unit, is equally important.
Get your business analytics project working for you. Develop the metrics and performance indicators that tell you what is really going on inside your company.
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