KNOW YOUR CUSTOMER – GRADE A+

Not only was it a sunny and hot Saturday afternoon, but several people in the neighborhood (including me) were also just returning from a 12-hour, 14-mile hike to a peak of over 11,000 feet.  They were tired and thirsty as were many of the other neighbors.  I bought a few glasses myself as I pulled into the neighborhood, and it was a welcome refreshment.  But then I started wondering why I was paying for lemonade a second time….

KNOW YOUR COSTS – GRADE F

Yes, they get an “F” for this critical business discipline because they failed to consider how much they needed to “reimburse” their supplier for their material inputs – primarily lemonade mix.  The surprised look on their faces was priceless when I asked: “How much are you going to pay me for purchasing and storing your supplies, allowing you to ‘rent’ my pitcher and cups, covering  the maintenance costs to clean what you have made dirty, and so on?”  Somehow they thought that everything they needed to run their business would magically appear.  We settled on a payment that was very much in their favor (I am their father after all).  Although the example is somewhat simple and may even seem immature, you would be surprised at how many entrepreneurs and business owners really don’t know what it costs to run their business.

KNOW YOUR BREAK-EVEN – GRADE F

Since they didn’t understand their costs, let alone the difference between their variable and fixed costs, they had no idea how many cups they needed to sell per pitcher to break-even on the pitcher.  As I helped them figure this out, they realized that one of their pricing options would possibly make them lose money…

KNOW YOUR PRICES – GRADE C

Their price for one cup, $0.25, was well-researched.  They had seen competing lemonade stands charge about this much, and they felt confident their product was at least as good as the competition.  Where they fell short was their pricing strategy for customers who bought two cups.  They would charge only $0.30 for 2 cups, a great deal for their customers – in fact, most upgraded to the two cup option.  However, once they learned about their break-even point, they realized that the number of cups per pitcher they would need to sell just to cover their costs was dangerously close to the total number of cups each pitcher would generate.  Pricing can be a tricky thing, always trying to balance between offering a good value and trying to be more profitable than the market will allow.

KNOW YOUR TEAM – GRADE B

Perhaps the most entertaining part of this experience was hearing a conversation between two of the kids.  One said to the other: “You don’t deserve to make as much as me because I sat out in the hot sun selling the lemonade.”  The other kid responded: “Yes I do.  I’ve been handling the money and that’s just as important as what you are doing.”  It took them a while to work out their differences, but they eventually did.  And we need to learn two things from this – first, partnerships usually don’t get into trouble until there is money or something else of value to fight over.  Second, compensation, equity, and contributions need to be clearly defined and all parties need to be held accountable to them from the commencement of the business.  Simple to say, very difficult for most to implement – but it goes a long way toward creating a framework within which all can succeed.

OVERALL GRADE – A

If the saying that you learn more from your mistakes and failures than your successes is true, then what my kids learned was well worth an “A” for effort and humility.  One son commented: “I’ll never make those mistakes again.”  Perfect – let’s hope he lives up to that.

5 Things You Should Never Tell an Investor

The most interesting part of this article publishing today is that I helped a client make a presentation to a group of Angel investors this morning.  Yes, we avoided making any of these statements.  My add-on to this article is the importance to segment your potential target market into as much detail as possible.  Making broad claims without legitimate backup is non-productive and mis-leading.

The main take-aways include the need to make them real and the need to use them.  Completing them does represent a task that you can check off of a list, never to return to your projections again.  Their real strategic and competitive value is in using them regularly.  Enjoy.

I hope you enjoy the read.  If you do, feel free to share it or Retweet it.

Staying with the swimming analogy, what if 5 other people swam from one end of the pool to the other at the same time as you?  In the context of the others, you can measure your performance.  What if you made the exact same swim 100 times before, and you knew each of your times?  Now you could understand your performance in the context of your past.  What if swimmers all over the world made the same swim every day and you could compare your time to theirs?  Again, this gives you another perspective on how you are doing.

In sports we seem to track every number and every statistic feverishly.  It seems like every night some individual or team is breaking an obscure record of which I have never heard.  Maybe tomorrow a college basketball team will break the winning streak for a team’s consecutive wins in January when there is a full moon

In business, we sometimes forget to use our numbers and stats to measure our performance.  That’s where benchmarking comes in, and, generally speaking, entrepreneurs tend to under-utilize this tool.  With this in mind, I am writing on some of the ways that entrepreneurs have and will continue to use benchmarking to improve their businesses and, ultimately, their cash flow.

First, here is a sample report that can be used in benchmarking.  If you would like a copy of a report like this for your industry, please click on the report below and complete the request form.

How can we gather this and other information, both quantitative and qualitative, to make a difference in our businesses?  When approached with an attitude of humility and genuine desire to improve, here are five suggestions to use benchmarking to help you take your business to the next level:

1.      Refine Key Performance Indicators (KPIs) – Some companies aren’t sure what they should be tracking and benchmarking.  As a general rule of thumb, there are main categories of data that need to be addressed.  I wrote about these at length in my blog post: The Key Business Metrics every Entrepreneur should know.  As we research industry data and talk to others in our industry, we typically find new numbers and/or ratios that make sense to track.  For example, after doing some benchmarking at a trade-show with companies from around the world, one CEO learned that these other companies were tracking some operational efficiencies down to the level of daily employee activity.  This CEO quickly implemented this KPI into his dashboard and now feels he has a much better handle on productivity, which is a major driver of both cash flow and profit in his company.

2.     Enhance the Business Model –  Benchmarking means we mine through a lot of data and information, find what is relevant, and then try to use it in some way to make us better.  This process inherently leads to insights into improving the business model a company currently employs.  For example, one company that uses our CFO services learned through benchmarking that it was taking much longer than others in its industry to collect on its receivables.  With a little more information and the discovery of some “best practices” it has overlooked, the company accelerated its collections, which had a significant impact on cash flow.

3.     Emphasize Internal Benchmarking – When we discuss benchmarking, we traditionally think about comparing ourselves to others.  Sometimes some of our most helpful information actually comes when we compare ourselves to ourselves.  As sales grew in one company, the CEO failed to keep an eye on her inventory relative to the growth.  Once analyzed against the company’s historical data, the CEO learned that inventory crept way too high relative to sales.  Empowered with this information, the company quickly addressed the issues causing the problem, inventory returned to regular levels in context to the history of the company, and cash flow increased.

4.     Mobilize & Harmonize Improvement Initiatives- This is often the trickiest part of benchmarking – actually implementing positive change.  We have found that when managers and key employees are included in the benchmarking process they tend to take more ownership of the ideas for improvement that arise from such efforts.  They work together to bring about positive change, which means it gets done more quickly and effectively than if everyone continued to work in their relative “silos.”  While with a Fortune 500 company with over 300 branch locations throughout the world, benchmarking between branches was encouraged.  The branches that benefited the most from benchmarking were those that involved more than just their General Manager in the process.  Not surprisingly, those same branches were also consistently among the best-performing business units in the entire company.

5.     Make it an Ongoing Part of Your Business – Benchmarking is not unlike anything else that requires consistent attention to makes its biggest impact.  Benchmarking once and trying to implement a few new ideas will create minimal, if any, sustainable results.  By making benchmarking a part of monthly, quarterly, and annual conversations and meetings, it will become more and more meaningful and helpful.

CONCLUSION

Whether you are a swimmer, entrepreneur, or into something else, numbers tell a story about our performance and they help us know what we need to do to improve.  Benchmarking is a critical ingredient to a well-run business.  Chances are your cash flow will benefit if you do it.

SOURCES:

FINANCIAL BENCHMARKING TAKES ON NEW IMPORTANCE

WHAT IS BENCHMARKING

BENCHMARKING SMALL BUSINESS PERFORMANCE