By Andrew Frazier, MBA, CFA, SBPro
For most small business owners and entrepreneurs, doing the numbers–really reviewing their costs, their sales, their margins–constitutes their greatest fear. Why? Because in so many cases, they are either not comfortable with math, they are not sure what to do–or they are simply afraid of the truth. Many small business owners go in to business with blinders on. You know, the “Don’t confuse me with the facts” mentality. As a result, their biggest challenge is not using quantitative measures (numbers) and only using qualitative information (feelings) to manage their business. In truth, it’s reasonable to be afraid, but being afraid can be detrimental and make you miss important things.
Running your business by the numbers is an irrational fear. Why do I say this? Because knowing your numbers can only help you. Most entrepreneurs and small business owners run their business by using qualitative analysis to make decisions. So-called “soft” or intuitive judgments may prove somewhat helpful–but they don’t always give you the harsh reality of where your business sits on the success-failure scale. By ignoring the use of quantitative measures, you run the risk of making different decisions than you would have if you understood the numbers associated with your choices. By using both qualitative and quantitative analysis in your decision making, you are better able to make the best decisions possible for your business success. What are two ways you learn how to make good business decisions? By taking the time to learn, study and plan or by losing money. Which way do you prefer?
Are you still afraid of doing your numbers? Just remember that it isn’t rocket science. I want you to answer a few questions to better understand. Do you know how to count? Can you add numbers? What about subtract? Do you know how to multiply? How about divide? I know that sounds silly, but that’s all it takes to be able to run your numbers. Fortunately, it is even easier than that because this is not a test of your math skills, so you can use a calculator to do everything. Therefore, your fear is irrational and there is NO EXCUSE for not doing your numbers.
I coach Myani Lawson founder of the Bergen Lafayette Montessori School (BLMS) in Jersey City, NJ. When we met, she was seeking to create the best educational experience possible for her students while doing it at a reasonable cost. There is certainly nothing wrong with that if you can do it and still stay in business. However, this strategy generally results in less income and greater costs, a recipe for disaster. Not surprisingly Myani was having cash flow challenges and wasn’t sure why. As an educator, it made sense for her to create the best educational experience without necessarily focusing on her operational costs. However, her tuition was less than all other Montessori schools in the area. In addition, items that other schools charged extra for such as an organic lunch and activities like karate, dance, physical education, and Spanish language lessons were included in BLMS tuition–even though she provided those services, at a cost to her.
Ultimately, Myani went from being an educator who has a school to a business person who runs a school. This is exactly the transformation entrepreneurs need to make but find it very difficult to do soon their own. Those two perspectives would result in differing decisions. So, how did she make the transition?
I helped Myani understand her business model from a quantitative perspective. When we reviewed her numbers, it clearly showed that her fixed costs were too high to be supported by the number of students she had. By doing that, she was able to start making decisions that would help her to improve the situation. However, this wouldn’t have happened if we hadn’t run the numbers. We also determined that if this trend were to continue, she would be out of business within several months. The analysis also helped her to figure out how much she needed to cut expenses and determine the amount of additional funds she needed to raise. This allowed her to create a viable plan to move forward successfully and ensure that she does not end up in this situation again.
We put together Myani’s business model on a spreadsheet, so that she could do projections and calculate how much her business could afford to spend on fixed costs, based on the number of students enrolled. She also looked at all the different expenses to determine what could be done less expensively or eliminated. We talked about strategies for increasing her enrollment, which would provide additional revenue to more effectively cover her costs and provide economies of scale. There is no way the right decision could have been made without running the numbers. I am happy to report that BLMS is currently in business, profitable, and thriving with twice as many students.
Andrew Frazier, MBA, CFA, SBP is the President of A&J Mgmt and Business Pro @ Small Business Like A Pro (www.SmallBusinessLikeAPro.com) in New Jersey. He helps small businesses owners grow revenue, increase profitability and obtain financing through coaching, consulting, and training services. He is also the author Running Your Small Business Like A Pro because the More You Know, the Faster You Grow.