"A lot of people starting out in business would prefer to have a step-by-step formula or a specific set of rules they could use to achieve their goals. The problem is, there aren’t any. Rather, there’s a way of thinking that allows someone to deal with many different situations and take advantage of many different opportunities as they arise."
- The Knack, page 3
"After all, to be successful in any business, you need to develop a feel for the numbers. You need to get a sense of the relationship between them, see the connections, figure out which ones are especially critical and have to be monitored accordingly."- The Knack, page 74
You’ve probably heard the saying, “The numbers don’t lie.”
Well, I’d hazard a bet that it’s a saying Norm believes in whole-heartedly.
“Numbers run businesses. They tell you how you can make the most money in the least time and with the least effort – which is, or should be, the goal of every entrepreneur. What you choose to do with the money after you’ve made it is another matter. You can give it all away if you want to. But you first have to earn it, and the numbers can tell you how to do that as efficiently as possible, provided you understand their language.”
So how do you learn their language?
The following two Insights explore how to do just that.
(And no, it doesn’t involve meeting with your Accountant.)
"Here's the best advice I can give to anyone starting a business: from day one, keep track of your monthly sales and gross margins by hand! Don't use a computer. Write down the numbers, broken out by product category or service type by customer, and do the math yourself, using nothing more sophisticated than a calculator."- The Knack, page 74
Yes, in this technologically advanced world, with the Business Intelligence and Analytics industry offering businesses innovative tools to gain better insight into their businesses; Norm puts it plainly, “With pencil and paper. No Computers allowed.”
Why?
Writing down your numbers (actual/projected revenue, expenses, gross profit, etc.) by hand, at the very start of your business, gives you a feel for your business that you wouldn’t get if you relied on a computer to produce these numbers for you. You get a chance to really focus on your numbers, instead of simply reviewing them; especially key numbers such as gross profit (not only sales).
“You have to write the numbers out by hand and calculate the percentages yourself. If you let a computer do the work, the numbers become abstract. They start to blend together. You don’t focus on them. You don’t absorb them. You don’t get to know them as well as you must if you’re really going to be in control of your business.”
This is something Anisa Telwar learned the hard way. She couldn’t understand why she was struggling to pay her bills when she had taken her cosmetics accessories business, Anisa International, “from zero to $1.5 million in sales, ‘…and I have nothing to show for that growth at this time.’”. She was aware of her costs, and sales markup, but couldn’t understand why she was short of cash.
After taking Norm’s advice to manually track her monthly sales, costs of goods sold, gross profit and gross margin, she had a “revelation”.
“The reports were a revelation. Anisa later told me that it was like reality hitting her in the face. For the first time, she saw what it took to make money in business. Before, she said, she’d been winging it. Afterward, she began to understand how she could be in control… She was doing fine with some products and customers, but the others were dragging the average [gross margin] down.”
"I believe every business has key numbers."- The Knack, page 79
One of the key advantages of regularly tracking your numbers is the ability to identify key numbers.
You begin to see what numbers really drive your business. And as Norm discovered with his record storage business in 2003, you can be alerted to “potential problems before they become serious, so you can make the right decisions in time to prevent further complications.”
Every Monday morning, Norm reviewed a two-page report on his business. One of the key numbers he tracked in that report was the number of boxes they put away the week before: a key number he had learned was a reliable indicator of overall weekly sales.
“If I didn’t have a key number I’d have to add up sales from all the different sources to get the total. As a practical matter, that would mean waiting until we did our monthly billing. But I didn’t want to wait that long, and I knew I wouldn’t have to if I could find a number that rose at the same rate as overall sales. After years of searching, I zeroed in on the new-box count and was eventually able to devise a formula that allowed me to estimate sales within 1 percent or 2 percent of the actual figure.”
One particular Monday morning in the spring of 2003, Norm noticed that the new-box count had decreased by 70 percent from the previous week, which immediately raised Norm’s red flag: “That stopped me dead in my tracks.”
Up until that point, they had been experiencing steady growth, and were in “constant hiring mode”. But based on the sudden, and sharp, weekly decrease, Norm put a temporary hold on hiring because he didn’t want to take any chances should the decrease be an indication of future events.
It turned out Norm’s cause for concern was valid. He noticed an overall decrease over the next four months, and their annual growth rate had “plunged from 55 percent to about 15 percent”.
So what’s the lesson here?
“Indeed, the best business people I know all have certain key numbers they track on a daily or weekly basis. It’s an essential part of running a successful enterprise. Key numbers give you the financial information you need to take timely action. Business moves too fast to wait for the monthly, quarterly, or annual statements from your accountant.”
From sharing stories of the entrepreneurs he’s advised, to the courtroom lesson in negotiation, each suggestion and mental habit Norm shares in The Knack, is supported by his countless experiences as a seasoned entrepreneur over three decades.
It’s this practical experience that’s beneficial to any entrepreneur. And any entrepreneur would be wise to learn from Norm’s experience.
“But you know what they say: A smart person learns from his or her mistakes. A wise person learns from other people’s mistakes. I guess that makes me smart. I hope that, through this book, I can help you to be wise.”
