As you now know, business owners are uniquely able to predict the future. By identifying activity flows and metrics, a business’s performance can be monitored and become very predictable.
But predictability is only half the battle. Smart business owners use this information to shore up weaknesses and double-down on their strengths.
To illustrate, let’s use the invoicing flow example from the last post. We predicted that we’d invoice $25,000 next month, get paid for $23,500, and collect this money, on average, 42 days after we invoice it.
Apart from simply predicting our future bank balance, we always want to ask, “Can we improve on it?”
Making Things Much Better
By asking why some customers don’t pay us, we learn that we don’t follow up on overdue invoices. We also learn that there’s a 6-day delay between our service people doing the work and our administrative people sending the invoice. What can we do about it and what will be the result?
What if we gave our service people iPads so they can create invoices instantly? And what if we changed our policy so that we get paid by credit card as soon as we finish the job? We can now predict this:
- The iPads will cost us $1,500.
- We’ll invoice $25,000.
- We’ll process payments for the full $25,000.
- We’ll pay 2% for credit card processing.
- We’ll get our money within 3 days.
- Our Accounts Receivable at the end of the month will be down to $2,500.
- Our bank balance will be $36,000.
Amazing prediction – and it seems quite plausible, doesn’t it?
Oh, here’s how we calculated the bank balance: we previously predicted a bank balance of $5,000. Subtract $1,500 for the iPads. Add the difference in Accounts Receivable from our first prediction ($35,000) and our second prediction ($2,50). $5,000 minus $1,500 plus $32,500 equals $36,000.
Now let’s look at our sales flow example:
- We spent $100 on FaceBook ads.
- Our ad was viewed 20,000 times.
- 200 people clicked on it and landed on a landing page on our website.
- 14 people clicked on our “Buy” button.
- 5 people purchased an item worth, on average, $37.
Using ratios is a great way to analyze metrics:
- 20,000 views that become 200 clicks is a 1% click-through rate (CTR).
- 200 clicks becomes 14 who intend to purchase (7%).
- Of these 14 people, 5 purchased (35.7% shopping cart conversion rate).
- 200 clicks becomes 5 purchases (2.5% landing page conversion rate).
And the most important ratio, the Return on Market Spend (ROMS): $185 in revenue divided by the $100 ad expense equals 1.85.
How could you increase your ROMS best? Improve your ad and improve your CTR? Change your landing page so that more people click the Buy button? Enhance the shopping cart experience so that people who click Buy actually purchase?
Make Things Predictable…
Look at your business as groups of logical flows. Attach key numbers to points on the flow. Gain insights into your business and start making predictions about all kinds of things, including bank balances.
…And Then Make Things Better
Compare your key numbers over time. Assess the affect of various decisions. Then correct, improve and double-down and, in so doing, predictably improve your business over time.