October 25, 2014

The Fantasy Football Approach To Understanding Your Financial Results

Imagine walking into a football stadium just after all the fans have left and the players have gone to the locker room.  You see streamers, signs, and various discarded items lying around.  You look up at the scoreboard and see that your favorite team lost.  The score was 28 – 24.

You Are Now a Football Coach!

football

As you stand there in disappointment, someone with a clipboard walks up:

“Here, I’m putting you in charge of the team – I quit.  Maybe you can improve them enough so they win next game and make the playoffs.”

How would you start working with your team to help them improve their performance?

I’ve asked lots of small business owners this question.  They almost always answer the same way.  The first thing would be to review game stats and the game tapes to get an idea of how the various parts of the game were played.

It is clear that you wouldn’t be able to effectively help your team improve without knowing the details of where they were successful and where they fell short of expectations.  No matter what specific approach you might take, it absolutely would NOT be to simply look at the score, and then start making changes.

Would it?

Obvious, But Not Obvious

Trying to improve and making changes by only looking at the scoreboard is exactly how most small business owners approach their business.  It is ironic that you clearly wouldn’t act that way in our imaginary situation, yet when it comes to your business, where real dollars are made or lost, you most likely do just that very thing.

Most small business owners get trapped trying to figure how to improve their financial results by looking at their profit and loss statement.  They take a look at revenue and expenses and draw conclusions such as:

  • “My revenue wasn’t high enough, so  I need more marketing to produce more sales”
  • “My direct costs were too high, so I need to trim some costs where possible”
  • “I’m spending too much on overhead,  so I need to find cheaper ways to operate.”

How You Measure Isn’t How It’s Created

The problem with that approach is that revenue and expenses are merely mathematical concepts that are measured on your profit and loss statement.  The reality is that revenue and expenses don’t tell you ANYTHING about how your financial results are created.  Revenue is created by the combination of how many customers buy from you, how much they purchase each time they buy from you, and how often they buy from you.

This is dis-aggregation.  Drilling into the mathematical creations that you find on your profit and loss statement and breaking them down into the actual components that combine to produce those mathematical creations.

The same approach can be taken toward your expenses.  As they appear on your profit and loss they are really nothing more than mathematical creations.  Your expenses (whether direct or overhead) are created by your customers, your products, or the activities that go on inside your business to connect them.

Taking this dis-aggregated view of your business allows you to really understand HOW your business has created the financial results you have been getting from it.

By dis-aggregating you get an up close picture of how your current financial results have been created.  And once you have that level of clarity you can take the next step toward creating the financial results you want.

And that next step will be the topic of my next post.

In the meantime, get dis-aggregating!

Football Photo via Shutterstock

2 Comments ▼

Steve Wilkinghoff


Steve Wilkinghoff Steve is a leading small business expert and author of the book, Found Money: Simple Strategies to Uncover the Hidden Profit and Cash Flow in Your Business. His experience with thousands of small business owners around the world has allowed him to create a proven set of tools, processes and an online software app that allow small business owners to create the financial results they truly want. You can find out more at Found Money CFO.

2 Reactions

  1. High level analysis can be helpful to keep an eye on things, but you’re absolutely right about needing deeper metrics and understanding to truly diagnose a situation and improve it.

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