THE most stupid phrase in business. Scale Lessons in Numbers.
I’ll reveal all shortly, but first, let me take you back…
It’s early October 2006 and I’m stood in WH Smiths with an armful of books (Kindles weren’t around then!). Yes, it’s a Friday and Jacki and I have nipped into town to get some last-minute shopping before we fly off to Mauritius on the Sunday.
I’m just about to walk up to the counter to pay when my phone rings. It’s my new Finance Director and I can tell from his voice that something is wrong. He tells me that we have a BIG problem and they’ve spent hours looking into it before they phoned me, but the long and short of it is that we’re £80k down on profit for the month.
As I edge towards the counter; he continues to unload his explanation on what’s happened, what they think they can do about it, and how he can manage the message to the Board as I’m ‘technically’ on holiday.
I’m pretty sure he wanted me to join in the panic to make him feel better, but all I said was: ‘Simon, no we are not; go and look harder, then call me back when you’ve found it.”
I ended the call and paid for my 22 books (it’s no reflection on Jacki’s company, I read a lot on holiday!).
Around two hours later I get another call from Simon this time his voice full of relief explaining: “we have found it, it was in the ‘Work In Progress’!”, with a change in tone continued: “but you knew that didn’t you?”.
I simply said I had a hunch, asked him to send over the final numbers, and that I’d see him in two weeks…
Before I explain WHY I knew we couldn’t be down, let me take you back to April 2004.
This was the day I started as CEO in a new company, only then to discover this business was losing £250k per month, and I only had a few months to reverse this.
What I did that week helped save that business and it had NOTHING to do with marketing or sales. Neither was it a restructuring exercise to make lots of redundancies (that came later, see Stage 3). No, it was understanding the numbers, working out how the business was connected, and what the flow was.
In our SCALE Model™ the ‘A’ is for ‘Alerts and Alarms’. The Alerts are the early warning systems that inform the business that things are about to go wrong, ignore them at your peril. Alarms are the final warnings that it’s time to take action or else.
So, what I did in that and every business since was to understand ALL the numbers in the business and more importantly how they connected. What I was looking for were the Alerts; specifically, one number that would tell me EVERYTHING I needed to know, the lead domino that would then cascade throughout the business. With this number, I could work out what was happening throughout.
You see, when Simon phoned and said we were going to be £80k down, I KNEW this could not be the case as my lead domino number would have had to have been so much lower it would’ve been impossible. I was about to go on holiday and leave a multimillion-pound company knowing that the business would tell me when it needed attention through my Alerts.
You now know the most stupid phrase in business is that I hear time and time again: “I don’t do numbers”.
How any decisions can be made without knowing your numbers is beyond me, but still, MOST businesses we start off with have little or no knowledge of ANY of the key numbers to help guide them in their daily, weekly and monthly decisions.
Our philosophy is: business is a numbers game played by a team, together delivering a compelling promise.
For all our clients we introduce a four-stage process regarding their numbers:
Stage 1 Understanding your breakeven
Stage 2 ‘As is’ where are you now
Stage 3 Rightsizing (what I had to do back in 2004)
Stage 4 Target model going forward
But to achieve any of these you need our SCALE 7 Numbers™. These join the dots in your business. The 7 numbers (in reverse order) are:
7 Your Profit
6 Your Operating Costs
5 Your Salaries (non-productive only as the productive salaries are in cost of sales)
4 Your Gross Margin Value / Gross margin percentage
2 Average Order Value
1 X (the number of products/services you need to sell to hit Your profit)
To make this work; enter your numbers for 7 ,6 and 5 and add them up. This is your Gross Margin Value (4).
Then divide this number by your gross margin percentage to get the Revenue number (3).
Finally, divide the Revenue number by your Average Order Value (2) to get your number of products/services your business needs to sell to make Your Profit (7).
See how they all link together:
4 45,000 – Gross Margin Value / 50% (Gross Margin Percentage)
Now let me explain how knowing each of these numbers helps in the four stages.
Stage 1 if you enter 0 as Your Profit then the Revenue number will be your breakeven. Why is that so important? Well, because once you hit your breakeven number every pound of gross margin you make goes straight to the bottom line. For our clients, we work out when in the year they have reached breakeven because after that it’s plain sailing.
Stage 2 – As is. This is the acid test in the business. If Your Profit is less than 0 you need to do something about it. Sounds obvious eh, but I’m never surprised at how many businesses don’t know where they really are.
Stage 3 – Right-Sizing. Two ways to do this. Cut the costs or sell your way out of the situation. I have generally found that the latter option rarely works. For me, it is best to cut the costs and rebuild when things are shaped right.
Finally Stage 4. This is where you can add whatever profit you want in at 7 and our SCALE 7 Numbers™ will provide an understanding of what you would need to do to achieve this.
You have a few options after reading this.
- If you don’t understand any of the above – then ask for help as you need it.
- If you understand but don’t have the numbers – then ask for help as you need it.
- If you have the numbers but don’t get the connection – then ask for help as you need it.
- If you have the numbers and get the connection but not at Stage 4 – then ask for help as you need it.
In simple terms – ask for help as you need it.
From now on we all do numbers…
The Scalability Coach | Britain’s Top 10 Adviser 2018 | Author of #1 bestseller I don’t work Fridays | Ex-CEO of a PLC