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If you don't understand your numbers, you don't understand your business PDF Print E-mail
Written by Donald Cooper   
ImageI'm amazed at how many of my clients can't answer simple questions about what their gross margin is, how many different SKU's (stock keeping units) they have in inventory, who their 10 most profitable customers are or what effect increasing sales by just 5% would have on their bottom line.

I'm all for passion, innovation and creating the extraordinary in business but, simply put, if you don't understand the numbers side of the business; you're going to be in big trouble. If you don't understand your numbers, you don't understand your business and you can't make good business decisions.

In the summer of 2007, Frank D'Angelo, founder of upstart Canadian brewery Steelback Beer, spent $5.4 million on marketing and promotion to generate sales of just $2.5 million. In 2002, his D'Angelo Brands juice company lost a whopping $4.8 million on sales of $435,000. This is just goofy. Clearly this guy has no sense of the basic math of business and profitability. He'd have to take his hands out of his pockets just to count to 10.

So it is with a fine dining restaurant owner who recently blamed the recession for his losing money. But, further investigation uncovered that his food cost is 70% of sales and he has two executive chefs, two sous chefs and 30 other staff. Anyone who understands the restaurant business knows that if food and wage cost combined are more than 60%, you're in big trouble.

So, while blaming the recession is an easy "out', this guy's whole business model is just mathematically flawed.

My friends in the agriculture business tell me that a farm in Ontario needs to be about 3,000 acres to be profitable. But the average farm in Ontario is only 300 acres. So, there are a whole lot of farmers out there complaining that you can't make money in agriculture, but their business model is wrong by a factor of 10. They have an emotional attachment to an uneconomic asset. They need to look at the math and make some tough decisions but, apparently, they choose not to.

When looking for ways to save, Marriott hotels recently discovered that by switching from breakfast bacon strips of a consistent length to the same bacon but of assorted lengths, they would save $2 million per year. A few years ago, one of my clients added $12 million to his bottom line by politely but firmly "firing" unprofitable customers. In both cases, somebody looked at the numbers and made good business decisions.

So, how much time do you spend looking at your numbers and proactively making good decisions and managing your bottom line? Do you have 10 or so key measures of performance that you get on a timely basis that allow you to know how you're doing, what you need to do to do better and then do you take the action required?

Donald Cooper has been both a world-class manufacturer and an award-winning retailer.  Now, as a business speaker and coach he helps business owners and managers throughout the world to rethink, refocus and re-energize their business to create compelling customer value, clarity of purpose and long-term profitability. For more information, or to subscribe to Donald's thought-provoking free business E-Newsletter, go to www.donaldcooper.com.

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Donald Cooper
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