By Daniel Steyskal, Trapezoid Business Services
If you cannot measure, it you cannot manage it. ~ Peter Drucker
Like a couple that doesn’t understand why they’re broke before every payday, small business owners rarely understand where their money comes from and where it goes. What’s worse, many depend on false metrics originating from one’s gut or a POS system giving out bad data.
Getting and analyzing data is never fun and can be intimidating to an operator who hasn’t dealt with equations since high school algebra, but by establishing clear metrics and following good data gathering practices even the most numberphobic operator will have clean data to make informed decisions.
Have A Clear Understanding Of Product Cost
If you are a restaurant and do not understand what each item on your menu costs to make, finish reading this part then stop everything, even close for a day and get those numbers down. A heartbreaking example of this was a Better Burger style QSR that was line out the door busy and operated by a passionate owner, who got deeper and deeper into debt each month. After a cost breakdown, we found he was losing a dollar on each sale, not even accounting for labor cost and paying the rent.
High-end restaurants need to use different metrics that could be an entire book, but a QSR must always keep food cost below 40 percent of sale price, retail must have product cost never exceed 50 percent and professional services must keep the cost of parts and labor below 60 percent. These numbers allow an operator to benchmark prices, then adjust to meet prevailing market prices while ensuring they do not lose money on each sale.
Know How Many Clients Come In Each Day, Then Each Hour
When someone enters a QSR they have pretty much made up their mind to make a purchase, so each person coming through the door represents a sale. Start measuring this either through making a mark on a notebook, using an infrared sensor, or some of the new DVR programs that will record this for you.
No matter how, you need to know the number of people entering your store so you can determine the revenue per ticket and how many tickets per hour. You don’t need a fancy program to conclude that in hours where you have more revenue you need more staff, but you need to know when your place is busy and when it is not. This also will reveal when your business can actually handle more sales versus overburdening your fixed infrastructure. This method applies to retail, but one also needs to note whether a sale was made or not for each walk-in. If the hit rate is less than 50 percent, you need to assess why customers aren’t biting — but above that focus on getting more foot traffic.
Know How Many Potential Clients Are In Your Service Area
City-data.com and referenceUSA, databases available through your library, both provide invaluable marketing data for free, but I have never met a client who used these services. Demographic data such as age, income level, number of children, profession, and other factors should be incorporated into any marketing plan; really any business plan before a place even opens.\
When a business is failing it needs to take a realistic assessment of if customers are really out there. Where a vape shop will be hurting, a cigar bar may do very well. Selling high-end liquor where average income is below $35,000 is as much as a fool’s errand as only offering well liquor when that income is $225,000.
The data is out there and can be used it to your advantage to see if the market is really there. “Build it and they will come” is for businesses which sell barely-used equipment at a discount when closing.
Finish this step by taking your daily visits and dividing it by the total target population to get percent potential market capture per day.
Know Your Fixed Costs
Rent, utilities, telecom, your own paycheck, etc. should be obvious figures, but very few business owners know about the flux in them. How much is rent going to go up within the lease or at renewal? Is your telecom promo packaging going to expire? How do utility costs compare to last month versus last year? Overall, this is a minor element, but nonetheless an important figure to know and track.
With these figures whether your business is viable or not becomes an equation, rather than a gut feeling. Plug these figures into your favorite calculator or excel sheet:
If is less than your monthly fixed costs and your business has been open more than a year, maybe two, close tomorrow, you’re throwing good money after bad.
Better to abandon a sinking ship and build a new boat than go down with something unsalvageable.
About The Author
Trapezoid Business Services is solely owned and operated by Daniel Steyskal. Daniel has been a POS provider and business solutions consultant since 2008 working with small to midsized businesses and national franchises. When he's not making the impossible possible for his clients, Daniel enjoys cooking, gaming, and volunteering in his community. Find out more at www.tpzbusiness.com.