As you can tell from my show Billion Dollar Buyer, as well as the ideas and topics covered in this book, there’s a great deal that I like about working with entrepreneurs. They have vision. They have courage. They have commitment to their ideas and their products. And they have the nerve to keep going when many others would happily throw in the towel.
But some things do bother me. And nothing bothers me more than an entrepreneur who doesn’t know his or her numbers.
It bothers me a hell of a lot.
By numbers, I mean everything to do with your business. Cost of supplies. Cost of production. Labor costs. Costs of sales. Margins. I won’t bother going into any explanation regarding them. You should know exactly what I’m talking about. And if you don’t, you’d better find out.
“Know your numbers. Numbers don’t lie.”
As an entrepreneur, chances are excellent that you know—or certainly should know—all those numbers are essential to understand. But in my dealing with entrepreneurs of all sorts, I’m constantly amazed at how many entrepreneurs don’t know these numbers like the backs of their hands.
First off, numbers concerning your business are the lifeblood of that enterprise. They tell you everything you need to know about where your business has been, where it is now, and, perhaps most importantly, where it’s headed. They offer the single most valuable and accurate read of your business in its entirety.
That’s a hell of a lot that goes without the attention it needs, if you don’t know your numbers.
Just as bad, even entrepreneurs who have a basic understanding of their numbers often don’t know those numbers at the level of detail they should. From where I stand, an entrepreneur needs to know numbers down to their decimal points. For instance, they should know if their utility costs are truly 4 percent. If you know your costs to every tenth, at the end of the month, you can see where you need to fix those numbers.
That kind of specific knowledge arms you with the best information to confidently make good decisions, particularly the tough ones.
I make it an ongoing, everyday point to ensure I’m completely familiar with all the numbers having to do with my businesses. I also make budgets an everyday priority. I have both weekly and monthly budgets to keep track of what we’re doing, from a profitability standpoint. I even run daily reports, which I call my “flash reports,” for each of my different businesses. These flash reports show me the most important information that allows me to know where I stand at all times. Knowing how your business is performing from a financial standpoint on a daily basis is equally important as selling your product.
You can and should do the same. Know what your lease payment is for the month, what your salaries are, cost of sales, and other known operating expenses, and track all of those expenses regularly, along with your revenue. To the extent that your revenue is greater than your expenses, then you know if you’re making money and if you’re on budget or not. Simple, but a key part of my success.
You don’t want to be surprised thirty or forty-five days after the end of a month to suddenly realize that you lost money. You need to know exactly where you are within a 5 to 10 percent degree of certainty—all the time.
Knowing your numbers is essential, no matter how your business is performing—the more specific that knowledge, the better. If your business is on the upswing, you must know everything about the income and expenses, to the smallest detail. If you don’t have a solid handle on the numbers for inventory, overhead, staffing, and supplies, you’re going to find it that much harder to take your business to the next level. Your decisions won’t be as sound, you won’t be able to think on your feet and make good decisions quickly, and you may inadvertently pass on great opportunities, because you don’t know if your numbers can handle them or not.
Numbers are just as vital when your business is struggling. Lacking specific knowledge, you may be unable to identify the problems holding back your business. Worse, you may decide that one particular area of your business is the culprit, only to discover later that your lack of knowledge about your numbers led you to something that wasn’t the problem at all.
When do you make that discovery? All too often, when you hand the keys to your landlord shortly after you shut down your business.
Knowing your numbers inside and out doesn’t stop with the numbers themselves. It’s also essential that you put them in perspective, so you know whether your numbers are where they should be.
I mentioned this in the prior chapter, when I discussed obtaining the most favorable lease possible. It’s critical to know what the going rate is for a certain amount of space—that is, what’s a good deal? Are there areas in the town or city your business is located where you’re going to pay a premium for space?
The same goes for your other numbers. Know that your labor costs should be in a certain range. Utilities should never account for more than a specified amount. These and other frameworks let you see a broader picture of what parts of your business are on solid ground and where you need to make some serious adjustments.
Knowing your numbers is also a critical element of your sales pitch, regardless of who you may be pitching. If you’re talking with a banker or some other lender, you’d better know your numbers inside and out. And if you’re talking with a potential business partner—such as me—your knowledge of your numbers should be every bit as thorough.
Still, when I’m talking with budding entrepreneurs, the conversation goes the same way all too often:
“What’s your cost of labor?” I ask.
“Uh . . .”
“How many employees do you have now?”
“Eleven.”
“Can those eleven employees take you from $2 million to $4 million in sales?”
“Well . . .”
“You do understand that if they can do that, you’ve effectively cut your labor costs in half, right?”
“Um, sure . . .”
And on it goes. Are margins holding up, including gross margins and net margins? Are you turning over more money but only making slightly more or the same in revenue? Sometimes the answers come from confusion rather than out of ignorance, such as mixing up labor costs with lease costs or mistakenly combining the two.
No matter the specifics, I’m continually shocked about how little people know regarding the economics of their own company. In fact, when I go in and meet these new companies, I can tell within three minutes if they have any idea what they’re doing.
All this raises a question: If I can tell in a couple of minutes whether a business’s numbers look good or not, what am I looking at?
I start with revenue. Next is cost of sales. After that are labor and other expenses. There are other issues to bear in mind, but those are the primary ones.
When it comes to numbers, most entrepreneurs assume that to make more money you have to boost revenue. That’s true, but not always. For instance, a business with labor expenses at 25 percent immediately becomes more profitable if those costs go down (a theme I talk about all the time on Billion Dollar Buyer). Selling more may mean nothing if your costs continue to increase—something that knowledge of your numbers helps you keep under control.
Although this sort of knowledge and analysis—being able to really dig into your numbers—is critical to boosting your business and pushing it to the next level, this doesn’t mean all entrepreneurs need to be numbers whizzes. If you’re trying to run a company but can’t keep track of costs and sales, make it a top priority to hire people who can.
They’d better be strong, because without them, you’re not going to survive. That’s because your numbers mean everything. Treat them that way.
TILMAN’S TARGETS
• Knowing your numbers is the most essential part of being able to take your business to the next level.
• Make daily flash reports and budgets a priority.
• A complete knowledge of numbers is also critical to any sort of successful sales pitch.
• If you don’t or can’t master your numbers, partner with or hire someone who can.