4 situations when small business owners MUST look at their numbers

“Numbers get confusing. I’m never quite sure what I should be looking at. But my gut has never failed me.”

Most small business owners are most comfortable making decisions intuitively; when they look at a situation and they just know the answer. These gut decisions are really useful. They can be quick. They are based on our past experience. They’re great; as long as the decision we are making is similar to a situation we have seen in our past. In a situation like this, our gut is well informed, and the decision is likely a good one.

small business owner decisions

But there are situations where our gut doesn’t know what it’s talking about! Really. It can happen. What if the situation we are looking at is new–nothing like what we’ve seen in the past? And what do you do when the decision is multi-layered,with lots of conditions and “what ifs” to consider; and no clear outcome, or no straightforward “right” answer? What if it’s a really important decision and making a wrong move would have dire consequences? In these situations it’s worth it to slow down, take a more analytical approach, and look at the numbers! Let me give you some examples.

1. Leasing new space

I’ve talked before about my reluctance to sign leases. We shouldn’t think of them as “rent”, instead we should think of them more like debt. Once you sign that lease it’s really hard to stop paying that rent amount; whether you need the space or not. So this is a decision that’s worth considering carefully.

leasing a new space

Also, leases are likely the largest single expense in your business! A 5 year lease for downtown commercial space can easily be a $500,000 – $1,000,000 obligation that you are committing to. Our gut has a hard time perceiving the impact of numbers this big, so it wants to think about it as $12,500/month. That may be true; but you need to pay that $12,500 if sales are up, or if sales are down. You need to feel comfortable with that commitment in good times, or difficult times. That’s too many scenarios for your gut — the gut wants, and works best, when decisions are simple and straightforward. Sometimes it tries to make something simple, that actually isn’t simple at all.

When there are many factors involved and the cost is a significant one, it is time to look at the numbers. Get a professional broker and have them help you with a spreadsheet so you can look at the different scenarios and see how those numbers add up over time.

2. Making significant hires

Up to this point you’ve mostly been hiring young, talented, inexpensive people. But it’s time to bring in the big guns. You’ve found this VP of Sales who has a terrific track record in your industry; she could really move the needle for your company! The only problem is , she wants to get paid — I mean really paid. She deserves it, if she can bring the goods, but how to afford it?

This is another place where your gut is uneducated. You’ve never made a significant hire like this, so it’s an unknown. And it’s a complicated. How fast can she bring on new work? What are the margins going to be? Do we need additional team members to deliver that work? Again, this is more than our gut can handle. There are too many options, too many risks to assess. It’s time to look at the numbers.

An interactive budget is really helpful in this case. An interactive budget will help you play out those “what if” scenarios so you can see what the best case and worst case look like. This analysis can also help you to set realistic expectations for your new team member — expectations that are backed by facts and analysis — that they can respect and be held accountable to.

3. Conducting mergers, buy-outs, or similar transactions.

Selling your business is a big deal — of course you would get professional help with that right? You are making this transaction once or twice in your life; professionals do it 10 – 20 times per year! But what about when you are making a strategic alliance, or when you find a small competitor who wants to join forces with you? Do you need that same rigor, or can you just “work something out” between you?

Yes, you need help. This is another situation where your gut is uninformed and there are lots of factors to consider. You need the analysis of a professional to build out some scenarios, some “what ifs”, and help you see ways that the deal your gut hammered out might go bad. Now you don’t want someone who is going to be your deal prevention team; but slowing down and doing some analysis and looking at the numbers now, can really pay big dividends later.

4. Taking on a huge new opportunity

Wow, this deal could double my business — like, overnight! I know I need to be aggressive to win it, but how aggressive? If I price this too high and they say “no”, I want to make sure I’m confident I made a good decision. But if I price it too low and they say “yes”… That could end up being really costly.

Here again we are in uncharted territory. This decision is outside the range of what we’ve done in the past — our gut has nothing to work with. Plus, the stakes are high. Our emotions can start messing with our gut. Not good. When our gut gets scared (or excited) it’s an especially dangerous time.

This is where I want the assurance that I’ve crossed the t’s and dotted the i’s. (Or is it the other way round?) Pricing a huge piece of business like that means that you really have to look at your capacity: staffing, space — how will it impact the work we are doing for our other clients? How quickly could we leverage it into more work of that size? Numbers — even if most are estimates — are crucial to this decision. Numbers are needed to identify the point beyond which we will make money, and before which we will only lose it. Once we find that point, we can create more scenarios to identify the price range that will position us for the greatest success.

It’s the rare small business owner who is naturally analytical — most business owners are more intuitive. But there is a time and a place for analysis. When that time and place comes, you need someone on your team, or among your broader advisory board, who can step in and step up. When do you bring in the big guns to do the analysis that doesn’t come naturally to you?

Small Business KPI Reporting Tool

Photo credit: Loozrboy, Death to Stock PhotoLexinatrixNguyen Vu Hung (vuhung),

Comments

  1. Great article, Brad.

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