One of my first clients sold farm equipment throughout central Indiana. During one of our first meetings, I asked him where he made the most money. He was 100 percent certain that almost all of his profit came from selling the big machines. This business had focused on the sale of these machines for 40-plus years and won many national sales contests.
After reviewing his financial results for a three-year period, I soon realized that nearly all of his profit came from servicing equipment. He made very little profit from machine sales.
The data always tells a compelling story if you pay attention. Unfortunately, very few people have the patience to analyze the data and would rather rely on their “gut,” which delivers a quicker response. The problem is that this response is driven by emotion and is often incorrect.
Trusting your immediate emotionally driven instincts is acceptable, in fact even preferable, if you are being chased by a bear in the wilderness or getting your family in the basement if a tornado is coming down your street.
However, in business, I’d advise you to start paying close attention to the data. If you don’t, you may get lucky every now and then and hit a home run, but I promise you won’t make it to the World Series. Serious, sustained business success is built on a foundation of sound information.
If you doubt me, you probably just landed a big deal because your neighbor was related to the CFO of a great prospect. I wouldn’t recommend building a business model around the relatives of the people in your cul-de-sac. Instead, you need to pay attention to a handful of key performance indicators (KPI’s) that drive every business in the world.
Let’s start with marketing, which I define as anything you do to get a prospect interested in your product/service. You can measure the success of your marketing by tracking a handful of KPI’s. First, how many prospects did you attract? Second, how many of those prospects were a good fit for your product/service? Lastly, how much did it cost to generate each qualified prospect?
Now that you have generated a qualified prospect, the next KPI to measure is the conversion rate. In other words, how many of these prospects become clients/customers? This number may not matter to a restaurant owner, but it’s critical for an insurance agency.
Once you have convinced a customer to make a purchase, carefully track how much they spend, how often they buy and their satisfaction with your product/service. Don’t worry – tracking their satisfaction can be as easy as asking them to fill out a five-question survey.
Finally, after the business of attracting, selling and servicing your clientele is complete, you still have the most important KPI to track – financial results. Did you make any money? Get your arms around these KPI’s to ensure that you understand the financial health of your business.
Start by understanding your gross margin – the amount of profit you make every time you deliver your product or service. Next, run a monthly profit and loss statement and compare these numbers to your budget. Finally, understand the amount of cash your business is generating and if this cash is adequate to service any outstanding debt.
Track your marketing, sales, service and financial KPI’s on a monthly basis, and you will instantly understand the health of your business. As with most things in life, the solution is simple. All you need to do is execute.