Just how exactly do you measure business success? You might feel successful. Of course, there’s the satisfaction of running your own company.
But these measurements are intangible (not to mention rather inexact). Luckily, in the business world, there are a wealth of metrics you can dive into. Broadly speaking, there are three overarching areas to focus on: cashflow, sales and hiring/managing staff.
“For me, all three are crucial but especially the first two,” explains Tom Cridland, founder of the eponymous fashion brand Tom Cridland. “As a start-up, cash flow is actually perhaps even more important than sales as it allows us to bring ideas for growth and, therefore, increased sales to fruition.”
It’s a position that’s mirrored by Lisa Forde, director of The Card Gallery, a business that sells specialist, handmade stationery. Forde began her business in 2004 with just £500 to invest, selling on eBay. These days The Card Gallery employs 11 people.
“At the beginning of my venture to build my own business, I was taught that ‘Cash is King!’ My husband, our accountant, and I have worked very hard to ensure we’ve never been in a negative cash flow position,” she tells BusinessZone. “This hasn’t been easy, especially during periods when we’ve purchased and moved commercial premises.”
“The wedding sector, in which we specialise, is very seasonal. This causes peaks and troughs across the year which impacts cash flow.” Through monitoring these cash flow trends, Forde noticed the need to diversify into other markets, including birthday, anniversary, engagement, and funeral. As the smart dashboard provider, 9 Spokes, put it recently, ‘cash flow is king, information is queen.’
“These have helped to flatten seasonality trends and cash flow issues,” she says. Operating with this broader portfolio, Forde also keeps an eagle eye on sales. “I monitor average sale prices, website conversion rates, and sales by sector. All this information helps us to make informed decisions. We carefully consider our budgets and staff time spent on product and design development, advertising, search engine optimisation, and social media strategies.”
Much like Forde, Tom Grinsdale, director of TOAD Diaries, an online retailer which makes personalised diaries, has seen revenues swell significantly in recent years. “We increased revenue in 2016 by 50% on the previous year, and in 2017 we are anticipating 30% in revenue against last year,” he says.
“Growth has meant there's been more freedom in our cashflow for investment in marketing and PR, and to measure the results.” But late last year, TOAD Diaries hit a rocky patch. “We've recently been through what you might call a cash flow ‘battle’, as in December 2016 we were unable to enter our offices when our landlord's premises were effectively shut down by Health and Safety, obviously making significant losses.”
“It has drastically changed my attitude and approach to towards managing cashflow. I am far more conservative regarding ‘speculative spend’. There does need to be some speculative spend, of course. The old adage of ‘50% of marketing works, but we don't know which 50%’ comes to mind. But, at the same time, we need to be mindful of providing for the unexpected.”
To begin with, you may well do everything in your business. As you grow you should hit capacity, a breaking point where you can no longer do all of these things at once.
With revenue growth comes perhaps the biggest complexity of all: staff. “Staff costs rise each year, both in terms of salaries and pensions and team size,” says The Card Gallery’s Forde. “My focus is to ensure all staff are concentrating their efforts and time on areas of the business which will bring us the greatest growth so that we can go on to achieve our vision of becoming ‘the number one stationery supplier’.”
Andrew Ward runs an app development agency called Scorchsoft. Being in tech, he says, his six-man team is expensive and “managing cash flow is life or death”.
“When you first start out in business you have all the time in the world, but very little money,” says Ward. “To begin with, you may well do everything in your business, sales, marketing, project management, design, development - everything. As you grow you should hit capacity, a breaking point where you can no longer do all of these things at once. It’s normally at this point where you consider your first employee or outsourcing some form of support.
“You need to plan for this day now and put in place a business model that supports that additional cost in the business for when it inevitably comes. This can affect everything from how much you charge, to how much you spend. Literally have a line on your cash flow forecast for that cost, even though it isn't there yet, it will change the way you are thinking right away.”
Ward adjusts his forecasts every time his team grows. It's a relatively simple calculus when hiring what he terms “a new fee-earning head such as a designer or developer”. These hires mean the potential revenue per head increases with each new hire. “The problem comes,” Ward explains, “as some roles are fee-burning, meaning that they are needed in the business but don't increase the maximum amount of revenue you can generate using your team.
“Another example is marketing spend, as though this generates more business, it doesn't in itself increase your capacity to service that business, it doesn’t always raise your maximum revenue potential.”
These slightly more speculative ventures, as TOAD’s Grinsdale also pointed out, make things much more complex. “As your business grows, this potential revenue per head figure can dart all over the place,” says Ward. “The right sixth employee may vastly improve profitability, but each new head after this may not have the same effect.
“Picture a freelancer starting an agency, they can make good money when it is just them, but taking on their first person can impact this significantly as their overheads rise. You have to consider payroll, tax, marketing expenses, support staff, software, hardware, etc. Often it's not until they take on their third, fourth, or even fifth person that this profit position improves. Sometimes you've got to be prepared to stay the course and take the cash flow hit in the short term if you are going to win in the long term.”
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