BUSINESS, ITS A NUMBERS GAME
When we talk numbers in business, the focus is rarely on the numbers relating to the risks of operating a successful business. In business, there are always risks. Therefore, measuring the numbers relating to risk, is an essential component in operating a successful and viable business. The following areas of risk are worth measuring accordingly.
A business which borrows, pays interest on those borrowings on every day there is an outstanding debt. Any day when profit is not earned, means the shortfall between profit and the interest expense must be made up on the other days. Therefore, do you know the number of dollars of profit which needs to be earned each day of operations to cover your interest expense?
With interest rates at their lowest level in history, it is worth knowing these figures in case interest rate increase tomorrow.
Knowing the number of dollars in the bank account which are in excess of liabilities assists to keep your business's financial reputation intact and you, the director, from being charged for insolvent trading.
In sales, the more contacts you make, the more likely you are to make a sale. Equally however, you run the risk of upsetting more customers who will never buy from your business. Do you know how many customers you have alienated and why?
A sale is made and an invoice raised. You cannot claim a raised invoice is a sale until the money is in your bank account. The sale may also not be profitable if the invoice is paid late. Do you know the number of invoices not paid and where a sale is lost?
For every invoice not paid, another bad debt and associated liability is incurred. Do you know the number of invoices raised which became a bad debt and a liability and their cost?
Every invoice raised incorrectly creates a customer enquiry or a credit claim. Stopping the causes of enquiries and credit claims saves costs. Do you know how many enquiries and credit claims are raised due to incorrectly raised invoices and how to stop these types of enquiries and claims reoccurring?
Every enquiry or credit claim not dealt with quickly creates another cost, or another occasion when you can alienate a customer, or may make a large problem from a small problem. Do you know the number of enquiries and credit claims not answered quickly and the cost to your business?
Not every customer is a profitable customer and every unprofitable customer costs money. Do you know how many unprofitable customers your business carries and the amount of loss for each of these customers?
Like sales, the number of contacts for the outstanding invoices is important to ensure your business gets paid quickly. Every missed contact for whatever reason, costs money and leaves your business's dollars in your customers' bank accounts. Do you know how many contacts are missed and the number of your dollars sitting in your customers' bank accounts due to missed contacts?
Business is a numbers game. Measuring the positive aspects of your business is important. To be a success however, you also need to measure the numbers associated with the risks of the business. In fact, knowing the risks of your business is often the greatest source of information to make a more profitable and viable business.
PS Do you know the average number of years between business and investments cycles? History shows there is 10 to 12 years average between the cycles. As a risk manager, I note that 2018 will be the 10th year since the previous GFC. Food for thought?