The TOP 5 things you MUST know when running a business.
A few years ago I was on a mentoring panel, organised by one of the big banks, where I joined a group of successful women. Great! I thought. I was quickly gob-smacked when I heard one of them say, in response to a question about managing sales performance, that, “while she’d spent 20+ years in her business, she had no idea of the financials and left that to other people”. I immediately questioned this and made it clear that I fundamentally disagreed with her philosophy.
After the engagement, I emailed my contact at the bank and made it clear that I did not think this type of leadership was acceptable, and that they needed to take far better ownership in vetting their panelists.
The real answer to that person’s question – I hope you’re out there reading this! – is that, as a Founder and/or executive within your business, it’s not just your moral obligation to understand the financial metrics of your business – it is also your legal obligation. Remember, you have a legal obligation as a director, and you also carry a moral obligation to those who you employ, or those who supply you, to ensure that you know what you’re doing and what the associated costs and risks are.
Being a law school drop-out and never attending business school, I’ve had to learn on the job. As co-CEOs of My Food Bag, James and I were leading a company with a substantial revenue ($0-100M in 2 years), and had accountability for 180 staff and 1000 contractors. Not to mention the hundreds of suppliers that relied on us to manage our company appropriately in our joint CEO roles.
My Food Bag may have started as a $0 revenue company, but without the right controls and understanding of our business metrics, there is no way we could have grown it to what it became.
So, here are our TOP 5 things you MUST know about your business!
- Revenue. The income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover.
- Costs. The necessary expenditures that must be made in order to run a business. Every factor of production has an associated cost. The cost of labor, for example, used in the production of goods and services is measured in terms of wages and benefits.
- Margin. Sales minus the cost of goods sold. For example, if a product sells for $100 and costs $70 to manufacture, its margin is $30. Or, stated as a percentage, the margin percentage is 30%.
- Cashflow – is the money that is moving (flowing) in and out of your business in a month.
- KPIs – a type of measure that is used to evaluate the performance of an organisation against its strategic objectives. Tracking your KPIs early and regularly will assist with decision making and if done well with highlight any issues inside your business.
If nothing else, being in control of your business will add value to your company. After all, would you buy or sell your house without knowing how much it cost? Would you do renovations or alternations to your house without knowing that value? No? Well, if you would not treat your house like that, you certainly shouldn’t treat your business like that either.
Know the TOP 5 and make sure you monitor and review each point thoroughly – particularly during times like these.