Which Numbers to Watch In Your Small Business

We can dissect and pull apart all sorts of numbers for any business, but we have to first identify what question we are trying to answer, otherwise we can easily get lost in the weeds.

The most important metrics (other than the basics of gross revenue/gross expenses/net revenue) are those that move the needle on your profitability. Depending on the particular industry/market, this will vary for each company.

Some important areas to consider:

1. Particularly indicative expenses such as COGS, labor, rent, marketing, technology, etc.
2. Margins, including: Gross Revenue/Net Revenue; Gross Expenses/Gross Revenue; COGS/Gross Revenue
3. Marketing/Sales numbers including: New Leads Generated; Total Leads; Sales Meetings; Sales Conversion Rates; Marketing Expenses; Time to Close a Sale

Deciding which aspects of your Profit & Loss Statement can be tricky!

*EXAMPLES*

Consumer Service Company
The steps to achieving revenue for this company involve:

1) list acquisition
2) direct marketing
3) customer registration
4) sales appointment
5) sales meeting
6) sale
7) billing

While we monitor each aspect, we have found that the single most important indicator of how we are doing is our close rate - Step 6 divided by Step 1. So if we reach out to 10,000 people this month and close at our standard rate of 2%, we know we're going to make the rest of our numbers for the month. When that rate goes lower than 2%, we work our way backwards to determine what is not working and make tweaks to the process. Sometimes we go above 2%, in which case, we learn from that, too!

Design/Manufacturing Company
This company has multiple revenue streams:

1) business-to-business sales (including in-line custom-design; in-line
products; exclusive design contracts)
2) direct-to-consumer sales (including company-owned retail store,
company-owned online store; custom design)

Pulling the numbers apart is time consuming and difficult. At this point, we have identified the most profitable aspects of the business (B:B in-line products and exclusive design contracts) and focus on pulling those numbers apart in detail, asking the basic profitability questions. For the company as a whole, we look closely at labor costs, which are the highest expense and also represent the greatest potential weakness for the company.

Virginia Ginsburg is founder and chief consultant at Swell Strategies. She is passionate about supporting small business owners and entrepreneurs in starting and running successful enterprises. An avid reader, in this blog she reviews books and articles and relates specific learning points back to entrepreneurial businesses.

New Products: How to Evaluate Ideas

Every entrepreneur starts with a great idea, and, chance are, successful entrepreneurs don't stop having more and more ideas over time.

The challenge for a true entrepreneur is not actually coming up with new ideas, but managing the stream that assails her on an everyday basis. How does she decide which ideas to pursue, and which to ditch?

When working on a strategic planning process with an entrepreneur, I'm always seeking ways for us to quickly churn through their ideas to identify the promising opportunities from the interesting dead weight. Here are some ways to evaluate new product ideas:

Basic Research: Once you have an idea, do some basic online research to determine how people are currently meeting the need you want to fill. Get a feel for how much other solutions cost, and see if you can find out who their customers are. You also want to understand some of the costs involved in developing the product. To get a broader field of vision, enroll some freelancers to dig around for you. You can find people who will spend 1-3 hours doing web research for you on Fiverr for just $5 a pop.

Interviews: If you can identify that there is a need to be filled and feel confident you can fill it, start asking around. You want to speak with potential customers, employees and competitors to find out what's really going on. Use resources like Elance to speak with people who have worked in your field. Also look for people you could hire to help you build your product. Pay them for an hour to interview them to learn everything you can about the marketplace, costs, problems, sticking points, etc.

Financial Model: At this point, you should be able to create a rough financial model. You need to include your pricing, your customer acquisition model and number of customers you can reasonably convert, and major expenses. Don't get stuck on the details here - you just want to get a feel for what will make this model work (if anything). Play with the model and determine how much wiggle room there is for increasing your margins.

Evaluate: Once you have all of your data, take a step back and consider the following 3 questions:

1. Can you find and connect with customers for this product?
2. Can you reasonably build a competitive product based on your access to talent, the competitors and costs? 
3. Can you make a healthy margin on this product?

Virginia Ginsburg is founder and chief consultant at Swell Strategies. She is passionate about supporting small business owners and entrepreneurs in starting and running successful enterprises. An avid reader, in this blog she reviews books and articles and relates specific learning points back to entrepreneurial businesses.

How to Raise a Bunch of Money For Your Business

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist Hardcoverby Brad Feld and Jason Mendelson 

What They Say: This book covers many aspects of raising capital for an entrepreneurial venture. While their focus is on venture capital, they provide excellent advice for entrepreneurs seeking angel capital, also. Here is a recap of some key fundraising rules:

• Know who you're talking to: do your research and know as much as possible about the venture firm, angel group, and individuals who are evaluating your business. (NOTE: they have a pretty high perceived self-worth, and a little knowledge about their accomplishments will go a long way)

• Develop the basics: You need series of explanations of your business:
• Elevator pitch - 1 sentence
• Short pitch - between 1-3 paragraphs 
• Executive summary - 1-3 page document 
• PowerPoint presentation - 10-20 page overview

• Know the details: All of the items listed above should touch on the following key elements:
  
• The Problem
• How big of a problem it is
• Why it should be solved
• The Product
• Why your product is awesome
• Why it's better than what currently exists
• The Team 
• Why your team is the right team for the job
• The Business Model
• How you will make money
• What you need money for

What This Means for Entrepreneurs: Luckily, unless you are seeking a bank loan or SBA loan, you will not have to build out a massive business plan, but sometimes bigger is easier. Creating simple, to-the-point explanations is key to fundraising. Your potential investors don't have time, and they simply are not interested in, a long discussion. They just want to know what you're going to do and feel relatively good about the potential outcome.

Good luck! 

Virginia Ginsburg is founder and chief consultant at Swell Strategies. She is passionate about supporting small business owners and entrepreneurs in starting and running successful enterprises. An avid reader, in this blog she reviews books and articles and relates specific learning points back to entrepreneurial businesses.

The One Thing You Can't Skip When Planning a Business

Most entrepreneurs enjoy the process of building out a great idea, and can tell me how they will make and market their idea, but few of them have created the financial model detailing the revenue streams and expenses. The modeling process illuminates whether the business will be scalable and sustainable. Therefore, it is the single most important aspect of business planning.

Here are some questions that I use to get the financial modeling process started:

Marketing

• How will you reach new customer prospects? (i.e. advertising, PR, social media, etc.)
• How many prospects can you reasonably expect to reach on a monthly basis?
• What will it cost to get prospects? (i.e. advertising, PR, etc.)

Sales

• What is the process of converting prospects to paying customers? (i.e. salespeople, reps, affiliates, etc.)
• How many customers can you reasonably expect to convert on a monthly basis?
• What will it cost to convert customers? (i.e. sales commission, affiliate fees, etc.)

Revenue

• What are your revenue streams? (i.e. subscriptions, advertising, product sales)
• What is your pricing structure for each revenue stream? (i.e. what will the consumer price be?)
• What is a reasonable conversion rate for each product? For example, if we're talking about online product sales, what percentage of site visitors will purchase? You need to estimate a conversion rate for each revenue stream.

Costs

• Startup Costs - what are the costs involved in launching the company? (i.e. brand identity, website development, content development, etc.

• Variable Costs- what are the costs involved in producing each product you sell?  

• Fixed Costs - what are your monthly fixed costs (i.e. office space, web hosting, salaries, etc.)

Are you thinking about starting a business? Start by building out your financial model - get help if you need it! Any investment you make in this one aspect of business planning is well worth it in the long term.