Feedback: How to Focus on What Your Business Really Needs to Be Successful Part II

Part I was all about discovery. If you did your PEST SWOT you will have a list of possible business goals you want to achieve.  If you haven’t already you can read it here. It also goes over why you need to go through these steps to get feedback from your business.

Part II is all about action.    

It’s time to take that list of goals and create a plan to make them a reality. To do that, we are going to use backward engineering.

What I mean by backward engineering is you set up your goals first then you set up your feedback system.

This reverses what I see most small business owners do – download some software, start entering transactions then trying to make business decisions based on the messy data the software spits out.

Take it from someone who has had to clean up those messy data files: you're better off throwing darts at a dartboard.

How to set-up feedback the right way 

I have broken the process into six steps:

Step 1 – Choose your goals

Step 2 – Assess your current position

Step 3 – Outline the crucial steps

Step 4 – Select your feedback

Step 5 – Set-up your feedback system

Step 6 – Review and revise

I know it takes some time to do it this way. I know it probably takes you out of your comfort zone. It takes grit and determination to succeed in business. So buckle up and let’s do this.

Step 1 – Choose your goals

Select the best three goals - no more. Any more than three and you will loose your focus.

You have to nurture these goals.

You have to commit to these goals.

You have to factor them into every business decision you make.

Choose them carefully based on what you believe is critical to your success.

The goals you choose should be simple, clear and specific. You may want to be the one who disrupts Amazon’s hold on e-commerce, but keep your goals down-to-earth.

I’m coaching you how to build long-term success - not the fail fast philosophy of Silicon Valley. It may seem a little old fashioned, and definitely not as sexy, but it works! Your goals should be ambitious, but not moonshots.

Step 2 – Assess your current position

The purpose of this step is to assess what resources you currently have. In a nutshell, we’re talking about time and money. Any goal you set is going to take a combination of the two.

List what you have available right now. Not your overly-optimistic, 'I’m going to be perfect everyday' assessment. This is your starting point. Everything builds off of this assessment so it has to be based on facts.

Something to think about here: your first steps may actually involve building up your resources before taking action toward your new goal. If you’re very short on resources consider strengthening your business’ foundation as a goal all on its own.

Specifically, there are two extremely important conditions your business must have before you will want to take on a new venture.

Your business must be profitable.

And

Your business must be cash flow positive.

If not, your business doesn’t have a strong enough foundation to support a new venture.  I recommend profitability and positive cash flow as priority goals.

Why?

Without profits and positive cash flow, a new goal or project could make your business dependent on outside financing.

Whether it’s a loan or ownership interest, outside financing increases your risk and reduces your independence.

Increased risk and less independence may be fine if you are willing to walk away from your business.  But, this blog is for gritty entrepreneurs in it for the long-term.

Step 3 – Outline the crucial steps

The purpose of this step is to construct the roadmap from where you are to where you want to be.

Just like traveling on real roadways, there is more that one route and possible detours along the way. These steps aren’t set in stone so don’t get hung up on perfection.

Lay out your best guess of the steps you need to take. Keep asking yourself, “What is the next best action?”

For each step you list, give a specific amount of time and a specific amount of money you will give it. 

Step 4 – Select your feedback 

Finally! We get to feedback (and what I like to think of as the fun part!)

You may be thinking, "yeah right, fun like a root canal!"

Stop thinking negatively and focus on how much this is going to benefit your business! Mindset matters.

You may or may not be familiar with the terms we are about to cover. Don’t worry. In the next section, we will cover setting up a feedback system where you just pick out the number and drop it in a formula. Remember, we are working backward!

So roll up your sleeves we’re about to dig into some details!

Because your business is giving you so much feedback, and there are so many ways to analyze it, business owners usually do one of two things

1) They choose to use every bell and whistle right from the start, become overwhelmed with data, and abandon the process

or

2) They get overwhelmed right from the start and abandon the process before they even get started.

Neither is good.

The best approach is to start simple and get fancy later. Choose just a few metrics that give you specific guidance. It’s all about quality over quantity.

For any new goal or for your business, in general, there are three very important pieces of feedback. Metrics that answer these three questions are great starting points.

Is it generating income?

Gross Margin Percentage provides the answer.

To calculate you will need a system that gives you your Net Sales (total sales after subtracting returns and discounts) and gives you your Cost of Goods Sold (total costs directly related to making the sales.)

Is it generating free cash flow?

Free Cash Flow provides the answer.

To calculate you will need to know your Net Operating Profit After Taxes and the increase in Fixed Assets.

Note: there are several ways to calculate Free Cash Flow. Remember we want a good starting point. You can get fancy later.

Is it generating profits?

Gross Profit Percentage provides the answer.

To calculate you will need to know your Net Income (your income after all costs are subtracted from sales) and your Net Sales (total sales after subtracting returns and discounts.)

Now you need a system to give you these numbers.

Step 5 – Set-up your feedback system

This is where software has leveled the playing field for small businesses. The software collects your business transactions and turns them into a Balance Sheet and Income Statement at the click of a button.

The information you need to calculate the feedback in Step 4 comes from these two financial statements.  And this is why set-up is so very critical. Your information has to end up in the correct spot on your financial statements.

It is your Chart of Accounts that links the everyday business transactions you enter into the software to the financial statements that provide the feedback.

You want your Chart of Accounts to be extremely user-friendly. This is why set-up is worth the effort and out-of-the-box is not good enough.

Consider these tips when setting up your Chart of Accounts:

Use specific account names that clearly describe what information they contain.

When you are recording a transaction you don’t want to have to guess where it needs to go. The accounting profession has standard names for accounts that people outside of your company are used to seeing. Remember this is for you. Use names that are meaningful to you.

Use a three-digit account number system.

This will make life so much easier! Software programs will let you skip this and just use names – don’t. An account numbering system has two big benefits.

1)   You know where on the financial statements the account data ends up.

As a business owner, you need to know where different types of transactions end up on your financial statements. This will GREATLY improve the accuracy of your information. For example, knowing what expenses belong in Cost of Goods Sold accounts, what expenses belong in Operating Expense accounts and what expenses belong in an Asset accounts.

A numbering system that uses the 500’s for Cost of Goods Sold, 600’s for Operating Expenses and 100’s for Assets makes getting expenses in the right place easier.

2)   It will make data entry easier.

You will quickly memorize the numbers for frequently used accounts and this will speed up your data entry.

Set-up an account to use when you don’t know where a transaction needs to go

There will come a time when you are too busy or too tired to figure out where a transaction needs to go. Or, a unique circumstance pops up. For these situations have an account set-up to collect transactions that need to be revisited. This will group them all in one place where you will easily see them later. Just guessing what account to use can get data in the wrong place and cause your feedback to be misleading.

Choose when to use general accounts over specific accounts.

The fastest way to sabotage your data is having too many accounts. It simply takes too much time to scroll through a long list of accounts and I promise there will be times when you are tempted to take a shortcut.

For example:

Only use a specific account such as Postage Expense if it is something you want to track separately. If postage isn’t a critical or large expense in your business consider putting it in a general Office Expenses account.

Don’t forget: feedback is a quality-over-quantity choice.

Your Chart of Accounts is the first thing to set-up in your accounting software, but it’s not the only thing. To really make the process efficient you should consider working with a professional. 

I emphasize the working with because they are there to help you get specific information out of the system. If you don’t have a plan or aren’t giving them input along the way you are no better off than just using the out-of-the-box preprogrammed set-up.

The set-up is not something you will do very often. The benefit of professional help is you don’t need to spend time learning how to do the set-up. Also, they can teach you how to use your software. This will cut down on your learning curve and get you back to actual work quicker.

Step 6 – Review and revise

Your business will grow, you will start new projects, and your goals will change over time. So will the feedback you need.

At least once a year, or at the start of a new project review what feedback you are listening to. It may be time to take a more detailed look at your business.

I know these two blogs have covered a lot of information. Don’t let this overwhelm you. Keep consistently taking small steps and work through the process.

I truly believe this can change your business and change your life.

Susan BrownComment