The Numbers Tell a Story
by CRP Partner Gene Baldwin
as published in Franchise Times
Oh, those awful numbers. You cannot escape them. Daily, weekly and monthly sales and customer counts pour in from each store. Monthly sales, margins, EBITDA must be reviewed and compared to budget. All these numbers can make your brain go numb. No wonder some business managers say they are not “numbers people” - and they are proud of it. You have probably heard the old joke about how an average manager can make good decisions if provided all the relevant facts, a better manager can make good decisions with only partial facts available to him and great managers can make good decisions with no facts at all. The reality is that you cannot manage a business without relevant, accurate and timely financial information.
The numbers are not your business. They are only a representation of your business. To me, numbers tell a story about your business if you are wiling to listen. The only way to understand your business is to read the story through the numbers. The language of the story is written in numbers. However, managing a business “by the numbers” can sometimes have a negative connotation. Many feel that if a business is managed “by the numbers” it is managed without feeling or concern for people. I look at it another way. To manage “by the numbers” is to read and understand the story of the business in its only language, the numbers it produces.
The numbers of the business are reported by the accounting department, who does not create the numbers (except for Enron). Accountants present the story of the business in a way similar to the way a court reporter presents a transcription of testimony in a lawsuit. Accountants are experts in the language of the numbers and should present the story in the most understandable way possible. Sadly, many accountants are satisfied with only presenting the numbers and never step back and assist with discovering the meaning of the story told by the numbers.
There are two kinds of numbers that tell a story of a business; dollars and operating metrics.
- Dollars present the results of business activity. They are the scorecard of how well the business performed. Dollars are like runs in baseball or touchdowns in football, they measure results. However, measuring dollars alone is not sufficient. Measuring and monitoring operating metrics is essential to favorable results.
- Operating metrics measure the business activity that leads to the results you want. The more time a manager spends reviewing, understanding, and taking action on operating metrics, the better his/her business will run toward the goal of more dollars. There are many operating metrics in a retail business: customer count, sales price, and sales mix. These sales metrics must be measured by month (or period), day of week, day-part and by delivery or order system. They must also be measured against results from previous periods. When properly read, these metrics tell a story about the ongoing relationship between you and your customers. On the cost side, operating metrics include product cost, product usage, inventory levels, inventory turns, etc. Labor is expressed in terms of the hours worked and pay rate for each position. When all these material and labor metrics are read together over a period of time, a story emerges about the quality of the unit manager and his staff.
Think of your annual financial plan as a story told through its numbers. It presents a story of the manager’s plans and aspirations for coming year and the individual steps he plans to take to achieve his goals. Once the year starts, he/she must measure actual results in both dollars and operating metrics against the plan on a daily, weekly and monthly basis.
Studying the numbers can be real drudgery. You spend day after day reading the numbers, comparing them against your plan, studying the trends, benchmarking them against the competition and discovering the story the numbers are telling. Understanding the numbers is not something you can delegate to others in your company. You have to dig out the story on your own. When sales and customer counts are going up, studying the numbers will be fun. When results turn negative, this endless study of the numbers will be very painful, but even more necessary.
Only after you have a thorough knowledge of the story found in the numbers will you have the freedom to either expand a successful business or take the proper corrective actions in one that is failing
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