Use Data to Make Better Business Decisions, Even With Imperfect Numbers

It started with the question of "I don't know what to invest in or even how much I can invest [in my business improvements]?"

And ended with...

"This analysis is amazing. Wow."

Data can be truly eye-opening to the business owner and make a world of difference in the life and growth of a business.

But if that data is not readily accessible to you (or you don't know what to start with or where to look for it), it's more often than not ignored or, in the case of financials, used only for purposes like filing taxes or wondering where expenses can be cut.

Thankfully, there's so much more you can get out of your data, and it's much simpler to get a, than you might imagine.

Not to mention... it goes far beyond questions like "do I have enough for payroll?" and "did I make a profit."

But before we get into ways to leverage all that information floating around in your firm, let's start with something even more basic.

How Not to Use Data

"We just need more revenue! We just need more revenue!"

Just because bigger businesses might have better access to their data doesn't mean they know how to use it better than you.

I can still picture my division head up at the front of the conference room, "motivating" all of us with his end game data to work harder and get more clients in the door.

Except... as the team responsible for business development, what did he think we were all trying to do day to day? Not increase our revenue?

There is good data and bad data. As well as good data used badly.

So when it comes to your growing firm, how can you (and perhaps should you) use data to get to your desired end game?

Definitely not by using it as a shaming device.

Make Data Useful With Comparables

When the analysis was delivered to my client the other day, one of the next questions was...

"How do I know whether this is good or not?"

Data gives us an objective perspective.

Sometimes that perspective is going to be good.

And sometimes not so good.

But most of the time, it doesn't mean anything at all... at least not on its own!

We need comparables. Comparables like:

Time = now vs then or now vs later (e.g. profit this year versus profit last year)

Horizon = how long something takes or lasts (e.g. lead to conversion time or client tenure)

Margin = against another data point (e.g. profit margin which is profit versus revenue or employee utilization which is billable time versus employee time)

Units = against a unit of time or production (e.g. monthly run rates or revenue per employee)

Peers = against external standards or benchmarks (e.g. industry standards or averages)

Goals = against internal standards or benchmarks (e.g. a profit decrease might be okay depending if it the difference was due to investments vs expenses)

Investment = against what was required to produce the result (e.g. ROI)

The best businesses are going to use a combination of these AND compare progress over time. Growth related data is never going to be a one-time affair.

So as you figure out which KPIs are relevant to your goals, find comparables and complements that give you the full picture, and build a data plan around those, comparing progress over time and/or against your expectations.

Regroup Data as Needed

There are some common places where your typical P&L can get confusing, especially if, like most people, you didn't come into your business with an accounting or finance degree.

For starters, what do all those expenses really mean and what do you do with them to improve your business?

In that year-end exercise with my client, I reclassified the P&L into a couple of key buckets.

(And by this I mean I reclassified them in a spreadsheet, not in the accounting system! Keep your actual books clean and under the domain of your bookkeeper, controller and CPA.)

One of those breakdowns was showing the percent coming from three main buckets of Marketing, Payroll, and Other OpEx just to give a clearer picture of where the money has been going.

Regrouping for your own purposes, not your tax filing, can help you make sense of some of the buckets sitting in multiple categories across the P&L.

For example, things like contractors, salaries, professional fees... (or agencies, ads, creative, networking and referral fees...), your bookkeeper has reasons to slot these where they should be.

But having them grouped together in ways that are more tied to your business decisions, can be more informative for you as the owner, especially when it comes to those over time comparables.

Reclassify The Data Too

Likewise, there may be something to reclassify that's not relevant to filing taxes but is relevant to your decision making or how a potential investor or buyer might look at things later.

Like the pay that's coming to you via an owner's draw vs the pay you get through a salary. Your P&L may look profitable, but that's not where your Owner's Draw hits. In fact, it doesn't even show up on the P&L. You can find that on the Statement of Cash Flow instead.

If your Owner's Draw is really what you're living on, not a bonus...

If your Owner's Draw is not showing up on your P&L...

You won't really know what your true P&L is - meaning the profit you can withdraw or reinvest - until you've subtracted this number out.

So consider reclassifying some things (again, in a spreadsheet, not in your accounting software!) if it makes sense to do so.

Note: if your CPA is having you take your earnings as a combination of salary and Owner's Draw, that's likely because it's saving you money in taxes. Totally fine. Follow their advice on that. But you need to recalculate profit for yourself outside of your accounting system so you understand what you made in profit this year that you didn't already pay yourself. Because if calling a halt to your Owner's Draw means not being able to pay your mortgage or buy groceries or do normal life things, it's "salary" in your terms even if it means something different to the IRS.

Build Consistency In How You Measure

You don't have time to waste trying to figure out if a big jump in profit is real... or if it is simply due to calculating the information in a new way.

Even worse, you likely can't afford investing in something using money that isn't really there or based on expectations that came from bad (aka miscalculated) data.

So get in the practice of setting a standard for calculation and sticking with it.

All the regrouping and reclassification for your data is fine as long as you keep track of what you're doing and how you do it.

In one of the reports I pulled - a summary of income by customer - I copied over the analysis to slice and dice it different ways.

This gave us information like the concentration of revenue with certain clients, who were repeat buyers, and which types of engagements created the most income. Which then led to profit margin analysis and some predictive analytics for the next year budget. Plus a list of the top 10-20 relationships to focus on in the next quarter.

But I also added some step by step instructions right at the top of each tab. Which...

A. makes it easier to pull and arrange the same data in the same way in the future and...

B. means we'll be comparing apples to apples over time

Because the reality is, by the time these reports are next needed for review, that knowledge will have quietly disappeared out of memory and back into the ether, pushed out by all the other noise that needed space in your brain.

Of course, that was just a shortcut notation. As this client hones in on the most relevant KPIs, we can formalize the calculation process - in a Standard Operating Procedure or later in a dashboard - so that anyone running the numbers can get it right.

Just remember, we want to compare apples to apples not apples to oranges. So commit to a method, mark it down, and move forward, even if it's imperfect.

Figure Out The Metrics That Matter To You

I've worked with clients who will go into debt to hire a new employee. And others who sit with more than 12 months of working capital in the bank but are scared to spend any money.

Some firms have, and will perhaps always have, a flat fee, one-and-done style service across hundreds of clients yearly while others have repeat business with recurring revenue streams over just a handful of high value relationships.

From your tolerance for risk, to the business model have, to the business model you aspire to...

You are who you are.

And the data you collect and measure should reflect that.

Financial Measures My Clients Benefit From

There are some metrics I see my clients repeatedly get benefit from.

Among them are (in no particular order):

• Average Engagement Size
• Client Lifetime Value (LTV)
• Monthly Run Rate Revenue
• Cost to Acquire A Customer
• Conversion Rates
• Profit Margin - on the whole and by engagement type or size of client/engagement
• NPS or some other measure of client happiness
• Months of Working Capital
• Revenue per Employee
• Revenue vs Budget (or Revenue vs Estimate) by project

But even within this list are nuances based on who you are and how you work with clients.

If you offer a one-and-done service, without opportunities to repeat or expand business with clients, you might value average engagement size over LTV.

Or you might set a goal to expand LTV by adding a recurring revenue offer and then track how that pans out over time.

You might also want to dig into non-financial measures to get what you need.

Non-Financial Measures To Consider Too

If referrals are your primary lead source, driven by networking, you'll likely want to measure the time spent, the number of connections made, and value of your top relationships vs rely on an amount of marketing spend.

Both can represent the Cost to Acquire a Customer, but one shows more cleanly on the P&L than the other.

Make Data Your Friend

You won't always like what the data shows you. But consider it part of your roadmap to success.

Because knowing what to invest in, and how much you can invest, comes from data.

It provides objectivity.

It gives you something to shoot for.

And it's the foundation for creating predictability and profit in your business.

If you're ready to make better use of the data generated in your firm, let's talk.