How many times have you heard; cashflow is King? Money in the bank is regarded as the lifeblood of a business and long thought of as an indicator of commercial success.
Yes, without cash flow, it’s impossible to remain in business, but without a thorough understanding of all the numbers, you can’t determine whether it will be sustainable in the long term.
“Companies that link nonfinancial measures and value creation stand a better chance of improving results.”
A significant amount of money in any business doesn’t belong to the company or the owner. There’s funding for ongoing tax obligations such as PAYG, Super, and Tax instalments. Then there’s also likely to be money owed to suppliers or deposits for future services from customers.
The bottom line is that cash in the business is NOT a good indicator of whether the business is succeeding commercially.
What makes an idea commercially viable?
Operational vs Commercial Success
It’s one thing to have your system down to a fine art; don’t get me wrong, it’s vital. You can have the most incredible product or service imaginable, but success will elude you if your delivery system is compromised.
But that’s only half the picture. You may have a fantastic idea that sounds like a sure-fire winner, but it will only be viable if it addresses a need and provides a solution that people actually want!
“Take a look at Airbnb. Airbnb was started because a bunch of people came for a conference, and they opened up their home and had people stay in this air bed and breakfast. Because they set up all these air beds, that's literally how it started. It was a real solution to a real problem. And because it worked so well they did it again, and again, and again. And before you know it, a business was formed. Those are the best ones.”
Many business owners mistake operational success for commercial success and are surprised when their companies go under, even while delivering on every promise. The research bears this out.
“The managers of a fast-food chain, recognizing that customer satisfaction was important to profitability, believed that low employee turnover would keep customers happy. “We just know this is the key driver,” one executive explained. Confident in their intuition, the executives focused on reducing turnover as a way to improve customer satisfaction and, presumably, profitability. As the turnover data rolled in, the executives were surprised to discover that they were wrong: Some stores with high turnover were extremely profitable, while others with low turnover struggled. Only through proper statistical analysis of a host of factors that could drive customer satisfaction did the company discover that turnover among store managers, not in the overall employee population, made the difference. As a result, the firm shifted its focus to retaining managers, a tactic that ultimately boosted satisfaction and profits.”
There are three commercial drivers in a business (ignore them at your peril)
The three drivers of commercial success are:
- Price
- Volume
- Cost Control
Make sure you look at the metrics that matter.
Most importantly, match revenue with costs.
My number one piece of advice is to match revenue with costs. In other words, focus on revenue and how it’s generated and then match costs to revenue rather than simply spending money based on a budget.
Let’s get into the nitty-gritty of the metrics.
Price
How are you at pricing your product or service? It’s often one of the most challenging things for a business owner to do—charge appropriately. I rarely see people charging what they’re worth, with decisions usually based on fear, whether of losing a client or not winning a new customer.
It’s unsustainable and one of the fastest ways to burn out in business. I’ve met many business owners who tell me their product or service is the best in the market, but their pricing doesn’t bear it out. Unfortunately, people mistake “charging less than everyone else” for being competitive.
If you operate like this, you release value to your customer that you need to sustain, develop, and grow your business. Commercial success relies on delivering great commercial value to customers while charging the right price.
“If you don’t value your time, neither will others. Stop giving away your time and talents. Value what you know and start charging for it.”
Volume
Every business owner I’ve met believes volume is one of the best indicators of commercial success. Of course, we all love the feeling of closing new business or retaining a client, but it’s the adrenaline rush and the belief that more sales must be better that we’re keying into.
The reality is that more sales without the proper share of value turns business owners into little more than indentured servants, working hard and seeing little long-term return. Another quarter goes by, and no matter how hard you work, you feel like you’re wading through mud.
Volume is one of the critical drivers of commercial success, but it’s not the only one. It can make a big difference to commercial success, but only when combined with price.
“You’re giving that away!”
When business owners are too focused on volume to achieve high revenue and choose to price their product or service at a suboptimal level, they’re basically giving their product or service away.
Remember: a price increase of $1 will bring more value than $1 of additional volume.
Cost Control
Cost control comes more naturally to business owners looking to rein in expenses. However, remember that cost control is in the same league as inventory control. It has to be done, but don’t make the mistake of thinking it will take your business forward.
Cost control will make sure you don’t waste money, but it won’t help you make money.
Revenue creation is the mechanism for making money and the key to ongoing commercial success.
When I think of cost control, it reminds me of the old saying, “Don’t be penny wise and pound foolish!” Make sure you take variable costs into consideration. Find out why your costs for certain items vary and make the most of them. Variable expenses are much easier to control than fixed costs, so ensure that as many costs as possible are variable.
This might look like having part-time employees or subcontractors or taking on a co-working space rather than investing in a fixed-term lease. In addition, variable costs make it easier to ‘flex’ as sales volumes vary over time.
You need all three drivers to succeed commercially.
A couple of things to note and some parting words of wisdom.
- When numbers are historical, they’re firm but fixed. When looking at the present and future, numbers are much more dynamic and respond to action. History is valuable, but don’t forget to be future-focused.
- If you look at your profit and loss (P&L) account as your measure of commercial success, then reflect on how many lines of data there are for sales and how many lines of data there are for costs.
- Most P&L accounts have one line for sales and fifty lines for costs, potentially focusing business owners too much on costs when trying to determine commercial success.
- Two drivers relate to revenue generation, while only one relates to costs. That gives you a heads-up on where to focus your attention.
- Think of revenue as a combination of volume and price rather than a single number.
- Consider revenue as the expense driver rather than deciding on a fixed budget amount.
Remember my opening line, cash in the business is NOT a good indicator of whether the business is succeeding commercially.
Finances are typically stressful for many business owners, but you don’t need to be a bookkeeper or accountant. However, you need to be across the right numbers in your business. Only then will you understand the strengths and weaknesses of your business and be able to chart a course for commercial success.
It will be a game changer for your peace of mind and long-term success if you allocate time to work on your business by getting across the three commercial drivers of price, volume, and cost control.
