GrowthForce's President and CEO Stephen King, and Robin Stanaland, experienced Executive Consultant, Business Coach, and Master Chair of Houston’s regional Vistage group recently got together for the Put Your Numbers To Work podcast.
In part one of the podcast, Robin explains how data-driven decisions will maximize your company's revenue, minimize your costs, grow profit margins, and accelerate success.
In part two, they discuss how monitoring income and trends like Trailing Twelve Months helps you make strategic decisions, including how to be more prepared if you're at the exit stage of your businesses lifecycle.
Reveal Trends in Your Net Income or EBITDA
To keep a bead on current cash flow, businesses should monitor their net income or EBITDA on a regular basis. During our interview, Stanaland pointed out that most business owners have a difficult time understanding the value of the two different figures.
King explained that, "EBITDA is a great placeholder for cash flow . . . If you buy companies or you're buying and making big investments in equipment, plant and property, or manufacturing, you're going to have a lot of depreciation." King continued to say, "If you buy a business or buy some software, you might have a lot of amortization. Those are non-cash expenses. So EBITDA is totally the right way to go instead of net income . . . when your depreciation and amortization is a big number. Because then, EBITDA is basically a placeholder for cash. But if you don't have a lot of depreciation or a lot of amortization, then net income is better."
Streamline Your Hiring Process with Better Foresight
With unemployment at all-time lows, Stanaland has observed that many of her clients struggle with turnover and timing their hiring processes correctly. She described how "it's really hard for business owners to know when it's the right time to hire," because they do not understand how to analyze the sales process to hire on time. They don't want to hire too early, nor too late. She said, "It depends on the cycle for hiring and the cycle for sales, and . . . those that use KPI scorecards in our group really have a competitive advantage over their competitors."
According to King, "Business owners need a financial management strategy and they need a human capital strategy. Just like if you want to lose weight, you need diet and exercise, right?" King did agree that turnover is a major issues that all businesses face. He said, "We want clients for life, and we want employees to build a career here because we're all run by tribal knowledge. When a member of the tribe leaves, so does the knowledge."
Apart from creating a positive and rewarding working environment, business owners can't do much to predict the timing of employee turnover. However, knowing how long the hiring process takes and tracking KPIs, such as sales cycle and growth trends, can help business owners predict when they will require additional employees due to increased demand and business growth.
Gain Insights for Strategic Marketing
When it comes time to determine how you will allocate marketing dollars, King recommends studying the past to predict the future.
By tracking KPIs, such as lead generation on sales, you can determine which marketing channels have proven most successful in the past.
You can even calculate your return on investment to determine which forms of marketing and which campaigns money will be well spent in the future.
Increase Your Business Valuation to Prepare for Exit
Outside of her role in Vistage, Stanaland values and sells businesses on behalf of owners looking for an exit strategy. She explained how business owners tend to over-value their businesses. "But you go in, and they don't really have any key indicators," she said. "They don't know what drives sales. They don't know what drives growth. They don't really have the right accounting processes or the right reporting to be able to . . . go out and find a good financial buyer."
As a result, owners end up selling their businesses for much less than they could be worth. According to Stanaland, the difference between a two million dollar valuation and a twelve million dollar valuation lies in implementing a few key processes. This helps to identify leading growth drivers and indicators that can be marketed to prospective buyers in order to sell them on data-based projections.
Use KPI Scorecards to Help You Measure, Track, and Apply Your Business's Financial Data
Up to date financials, reported on a regular basis, are essential to management accounting and making data-driven decisions to achieve business success. GrowthForce's CEO recommends using both trailing twelve-month charts and monthly KPI Scorecards in order to observe financial trends, warning signs, and other informative data at a glance.
Trailing Twelve Month (TTM) charts provide an overarching view of a company's financials over a long period.
During their discussion, Stanaland told King that one of the most common questions Vistage members, who are new to monthly KPI scorecards and trailing twelve-month charts, ask is why looking at a TTM trumps viewing financials month by month.
King explained how the TTM provides business owners with better insight than looking at month-by-month numbers. "When you look at a trend over a year, at the end of the year, you've got two years worth of data," King said. "The reason that's so important is [that] it eliminates seasonality."
A typical TTM chart includes:
- Data from the 12 months prior to the beginning of the current month
- Data from the current year
- Financial data from the prior year
By looking at years as individual data points, TTM charts help business owners view their business finances objectively by eliminating the inevitable peaks and valleys that occur seasonally in businesses.
With a trailing twelve-month chart, you can easily see how your business's current performance compares to the previous year, make decisions to prevent past problems from recurring, and shore up your finances to support your future goals.
King also recommends that clients generate trailing three-month charts, as well. "Trailing three-month charts are the same thing as trailing twelve. Except, as you would expect, they represent the last three months." King noted their differentiated importance, saying, "It's like a leading indicator of what is going to happen in your trailing twelve."
According to King, using trailing three-month charts helps business owners predict what will occur in their twelve-month charts. Whether the three-month charts tend to be trending up or down indicates which aspects of a business require additional attention, such as lead generation, sales, gross profit, direct or indirect costs, operations, or efficiency.
Why Dedicate Time to Knowing Your Numbers?
As King put it, most CEOs "don't want to look at rows and columns." Dashboards or scorecards, however, "allows them to look forward by seeing their financial data in charts over time."
Throughout her years of experience, Stanaland told us that she has learned her clients, who are often entrepreneurs, "can be distracted very easily to go to the new thing as opposed to the nitty gritty of running the day to day operations." She believes, however, that paying attention to the numbers helps business owners stay focused on the meat and potatoes of their businesses. "That's why I think your KPI Scorecards are so important. They are good-looking, it's a quick scan to get to the point of what they really need to see, and it really helps to make those data-driven decisions."
That's what tracking KPIs truly comes down to: the difference between going with your gut and making informed choices in business management.
Watch and listen to the Put Your Numbers to Work podcast HERE!