Making Fact-Based Decisions
Running a business requires a lot of different skills. You are often responsible for marketing, human resources, IT, sales management and accounting. These typically aren’t the jobs you have the most experience with but you own them nonetheless.
As your business grows you may hire quality people to fill many of these roles but you never really take your hands off the wheel. At the end of the day you are the one who has to make good decisions — fact-based decisions.
You may have a vision of where you want to take your company and, hopefully, you have a plan to get there. One component of a business plan is the budget. In that budget we plan for purchases and staff increases, as required to grow the business, but what happens when we want to spend money on something that isn’t in the plan? It may make sense to spend money on something that isn’t budgeted, but we need to think about a few things. Here are some good questions to ask yourself as you consider new investments:
What is the return on investment?
If you are missing out on sewer main line opportunities because you need another camera then calculate how many additional sales will result from it. How long will it take to recoup the investment? Calculating this on tools, trucks or technology is often easier than figuring out how much revenue adding a person inside is worth. Adding a customer service representative may result in “X” more captured calls per day resulting in “Y” more revenue. Adding a service manager may make sense if you calculate how much additional revenue will result from their management of the calls and the training they are providing the technicians. The point is to try to quantify the return on investment even if it involves additional staffing.
Can I track the results of this additional expense?
The return should be tracked and managed daily, weekly and monthly to get the results you paid for. For example, if you had one camera and you were getting it in three sewer lines per day and you added a second camera and still only inspected three lines per day you are not getting the return you expected. Now what do you need to do to fix that and get the return you need?
Do I need to spend this?
Sometimes we can rent a piece of equipment rather than buying it. I have seen a lot of expensive tools lying in warehouses because it was purchased for one job and rarely used after that. If you are hiring for a new position consider outsourcing rather than adding more people to the payroll. Looking at your operational structure or organization chart may be the key to optimize the staffing you already have in place.
Can I afford this?
Figure out how you are going to fund this purchase before you make the decision. A good way to keep you grounded in real costs are to factor in the indirect costs involved in the dollars you are about to spend. For example, if you are going to spend $10,000 and your company is operating at a 10 percent profit margin it takes $100,000 in revenue to make that money required for the purchase. Another way of looking at it is: this investment will have to generate $100,000 in revenue before it breaks even.
Growing a business is a balancing act between investment and cash flow. Probably the most obvious example is in marketing. This is an area where the return on investment is crucial to the survival of the company. When spending marketing dollars we are typically looking to either directly generate calls or indirectly brand the business. If the goal is to generate calls then find a way to track the results so that you know what is working and what is not. If you are spending money on a campaign that isn’t working you want to be able to pull the plug quickly.
Here in the real world companies don’t always grow. Sometimes there is ebb and flow or a cycle of growth followed by a loss of a contract or a shift in external factors. This is where you really need to have data to make a good decision. Think of your monthly and yearly income statements as maps that tell you where you really are. Don’t make rash decisions and start firing people because you had a bad month. If your revenue isn’t recovering and you are still carrying too much overhead then you may need to make some unpleasant adjustments based on that trend. Review your monthly income statements as soon as possible after each month so you understand where you really are and take action.
Successful companies are good at planning and thinking through decisions. With that being said they still make mistakes. The key is to know when you have made a mistake and correct it.