How Was Your First Quarter?
Wow! The first quarter of 2012 is over. It's in the books. How did your company do? If your business is like ours, things have been moving so quickly that it can be hard to see the forest for the trees. This is a great time to step back, take a deep breath, and determine where you are going for the balance of the year. Enough time has elapsed for you to see some trends, but there is still enough year left to make meaningful changes that will impact your annual results. We suggest answering three questions:
1. How did your business do? Do you know how your business did in Q1? At this writing, we are just into April, so perhaps your books aren't closed for the first quarter, but they should be closed by the 15th at the latest. In our experience, too many small businesses don't close their books in a timely manner. That's the rough equivalent of trying to call plays in a football game without knowing the score, the time left or the down and distance.
When you get your Q1 financials, will they have the information you need to know exactly where you stand? Some things you should see in your financial statements are:
Sales - Obviously, your P&L will contain revenue, but is it broken out in ways that are useful for management decision-making in your business (e.g., by geography, by product line, by job, etc.)?
Gross Margin - The money you made after you pay the cost of delivering your products and/or services, but before you pay selling, general and administrative costs.
Product Line Profitability - If you sell products, you should know the profitability of each of your product lines.
Job Level Profitability - If you provide a service, you should know the profitability of each of your jobs.
Aged Accounts Receivable - You need to know if you are collecting the money that is owed to your business in a timely manner and if not, where to go to get it.
Inventory - Your balance sheet will list your inventory, but you need to know inventory relative to sales by product (a typical measure would be inventory turns or days of supply). Be careful of averages. Your inventory may look great on average, but if you are stocked out of your fastest moving items and have six years of supply of your slow movers, that's not a good thing.
Cash Flow - A wise finance professor once told us, "You can't buy beer with profit, you can only buy beer with cash." Cash is king. Make sure that your profit becomes cash in the bank.
P&Ls are necessary, but they are not sufficient. Even in a smoothly running operation, financials are usually not available until several days after the month ends. That can be too late. Consider a business that ships product. If shipments start to go out late, that will eventually turn up in the P&L as reduced revenue. Unfortunately, by the time that happens, the damage is done, the customers are gone. What's needed in this case is a weekly or even a daily report showing the number of late orders. This will allow the problem to be identified and fixed before damage is done. Does your business have all of the metrics that it needs for you to sleep worry free?
2. Did you achieve your goals? Yogi Berra said, "If you don't know where you are going, you may wind up somewhere else." Do you have a clear plan for where you want your business to go? If so, how did you do relative to your revenue goals, spending targets and profit plans. Too often, plans are made, but then they sit in a drawer, #NotHelpful! Get them out and see how your company is doing. If you don't have goals, now is a great time to establish them. Metrics without context are meaningless. If you are told that sales in the northeast region were $45,605 in the first quarter, is that a good thing or a bad thing? Without context you can't possibly know. But, if we also told you that the revenue budget for the northeast in Q1 was $43,000, you would know that, from a revenue perspective, it was a good quarter. Goals provide necessary context for your metrics. Additional context can be provided by history and competitive comparisons.
3. What changes are you going to make? Insanity has been defined as doing the same thing and expecting different results. Don't be insane! If you aren't happy with your results from the first quarter, change what you are doing. Changes can be thought of in three categories:
Strategy - Many small business owners don't think they need a strategy. That's a highfalutin word for big companies. Fair enough, but there is one question that every business owner needs to be able to answer. "Why should a prospective customer buy our product or service rather than a competitor's?" The next question to ask is whether there are enough prospective customers who value the thing that differentiates your offering to sustain your business. If not, what are you going to change? If so, what is your plan to reach this group of prospective customers?
People - Do your people clearly understand what you want them to do? Do they need additional training? Have all of the roadblocks to success been removed (e.g., do they have the tools they need to do their jobs well)? Are the proper incentives in place - both rewards and consequences? If the answer to all of these questions is yes, but you are still not happy with the results, you may need to consider making a personnel change.
Processes - If your processes are broken, the best people in the world won't be able to deliver the results you seek. Make sure that your processes are documented and implemented consistently across your company. When a problem does occur, make sure to ask what needs to be done to ensure it never happens again. This is the first step on the path to continuous improvement.
Hopefully, your 2012 is off to a fantastic start. If changes are needed, don't procrastinate - see article one. There is still time to positively impact your year, but time is slipping away quickly.