There’s a growing sense that perhaps the economy is stabilizing. But for most company owners, it will be a long time before revenue figures can give any kind of insight into whether their business is still shrinking or on its way back.
A client asked me about this last week. Over the last five or six years he had developed a ‘feel’ for whether things were going well or badly based purely on sales numbers. But after the upheaval of the last three quarters, not only have his sales fallen dramatically but the overhead changes he has made are still taking hold.
The net result is that the business he used to understand blindfold has now become blurry to him.
In a post last week, I blogged about the need for context in any business situation. Over time, this particular client had learned through experience which factors most influenced profitability at each sales threshold. Eventually, he could apply the correct empirical information happened so fast it had come to feel like instinct to him. Now that both his cost and revenue foundations had changed, his experience no longer applied. The result, he needed new glasses.
If you feel that your business is out of focus and you’re not sure whether you’re headed up or down, there are a number of measurements that will be more meaningful than raw sales. If you think there are others please add a comment and I’ll update this post.
1. Accounts Payable Ratio
Add up everything you paid to all suppliers over a specific period, and then divide it by your average AP balance at a given moment within that period. This is your AP ratio.
In a typical year it might be 1:12. e.g. You spend $1.2 million on all suppliers in one year. Your average AP balance is $100,000. Your AP ratio is 1:12. Intuitively this makes sense if you typically pay your suppliers on 30 days.
In tough times you reduce spending and take longer to pay. If you reduce your costs by 20% your total AP falls to $960,000. But you take twice as long to pay, your average balance goes up to $190,000. Your AP ratio is now 1:5.
Go back and look at your ratio twelves months ago as a benchmark. Then calculate what it was 3 months ago. And what it is today.
If the ratio is higher than it was three months ago, your business is coming back.
2. Accounts Receivable Ratio
Track the percentage of your AR that falls into the 30, 60, 90 and 120 day groups. In the last six months, your 120 day percentage has almost certainly jumped by comparison with historic trends. If it's now on the way back down, you're getting paid more promptly. That shows underlying strength in your business and greater credit strength when you need to borrow. It also means you've started to weed out which customers you can count on, all vital foundations and indicators of a business on the mend.
3. Business Acquisition Window
How much time is elapsing between the first contact from a potential customer and being awarded the contract? In the last 180 days, that time span has increased.
If the number of days from contact to award is now going down again, your business is returning.
4. Negotiation Intensity
Count how many different contacts you and your staff are having with potential customers prior to being given a contract. This number has gone up since the Fall of 2008 as customers have become more reticent about spending money.
Getting contracts awarded is time consuming and expensive. If customers require fewer pricing alternatives and explanations, it leaves you free to focus on developing other leads. It's also a sure sign that your customers are starting to spend more readily again.
5. Lead Conversion
The number of opportunities to get work has fallen as well. Calculate how many leads you're converting compared to three and six months ago. If it's a higher percentage today than it was than three months ago, you're on the way back.
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