The importance of and the shortcomings of financial statements
No matter your approach to keeping score of the performance of your business (your financial statements), understanding the historical financial dynamics of your business is one of the most fundamental requirements for being successful (Strategic Marketing Consulting). But knowing how you’ve done is only part of ‘managing by the number.’ Knowing how your organization will, or should perform is often what determines success vs failure, or the difference between between a good business and a great business.
There is a lot of data and information that never makes it to your financial statements, but critically important to predicting the future performance of your business. And if you have your thumb on the pulse of these KPIs (key performance indicators), you’ll be in a much better position to know both where you’re going.
Business Consulting operations are essentially a series of conversions - you drop an input into a process and it pops out of that process converted into something else. Inventory is converted into revenue, interviews are converted into new hires, sales calls are converted into purchase orders, cash is converted into tools for your business.
One of the most useful conversion rates for every business owner to know is the closing rate; that is, what percentage of qualified leads (customers with a budget, at the right time and with decision making authority) convert to orders. This is simple but very helpful stuff
Closing rate = Leads closes divided by Total qualified leads
Think about the application of this ratio. If you need $100 in closed orders, and your closing rate is 50%, you better have at least $200 in qualified leads at any given time in order to hit your target of $100. This removes the emotion associated with managing your sales team (even if that’s you), and keep everyone focused on the activities that drives sales, as opposed to constantly asking, “Why aren’t we hitting our number?”
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Your sales funnel, that is, what prospects are where in your sales process, always gives you a snapshot of your potential future sales. This expands on the concept of closing rate, and enables an operator to focus on top-of-funnel activities, which result in qualified leads, which results in orders. Again, think conversion - what if you need that same $100 in orders, and 10% of all of your sales leads result in qualified leads: (website design Pittsburgh )
- Orders target = $100
- Closing rate = 50%
- Value Qualified leads required = $200
- Value of top-of-funnel leads = $200 divided by 10%, or $2,000
Armed with this information, you can now manage your sales team in a prescriptive, data-driven way. Missing your targets? Has your closing rate changed? Are there enough leads pouring into the top of your sales funnel?
Bottom line, the most important conversion of all if that of converting all of your business activities into cash. Understanding your future cash will enable you to plan for lean times (perhaps a line of credit is required) or position your Business Consulting Pittsburgh more solidly against your competition (investment). There are two basic inputs to understanding your cash runway - cash burn (how much you spend, week-in and week-out) and how much you expect to collect (accounts receivable and backlogged orders):
Weeks of expected cash = [Cash on hand plus Total AR] all divided by Weekly cash burn
Forecasted weeks of expected cash = [Cash on hand plus Total AR plus To-be-billed orders] all divided by Weekly cash burn
Savvy operators use all performance data, historical and forecasted, as inputs to fuel their obsession about predicting the future performance of their business. Avoid the trap of ‘driving while looking in the rear view mirror.’ These simple techniques will help you to stay one step ahead of your competitors and optimize the financial performance of your business.
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