It’s unfortunate that many business owners have never been taught to use their numbers as a drilling tool. If you’re one of these you’re probably scratching your head wondering where I’m headed with this. Here’s an example that illustrates my point.
Example
A concrete contractor’s average days’ sales outstanding (a ratio that measures the age of the accounts receivable) had gone up dramatically in just one month. When I asked why that had occurred I got the usual response “we need to boost our collection effort.”
I responded “Let’s see your accounts receivable aging report.” There were five accounts in the over 90 day category. When I explored the reasons for slow pay on each of these five accounts all but one was related to a common industry problem…the fifth was a quality issue.
In the four that were common to the industry, my client would land on the job site with all their equipment and a 10-person crew. The customer’s superintendent would request changes, then refuse to sign a change order. This posed a dilemma for my client, indeed for the industry as a whole, does my client pack everything up and leave, or do the work, bill it, and work it out later?
The latter was the industry practice. Once I had a handle on what the problem was it was easy to come up with a solution. I realized that the home office wasn’t being notified of the cost of the changes and were surprised by the bill. This resulted in negotiations which slowed payment to my client and often resulted in my client giving up half of the change order revenue.
The solution we came up with was to, in situations where the superintendent refused to sign a change order, have our foreman on the job call the estimator on that job to alert him to the changes that had been requested. The estimator then created a two-paragraph memo stating these are the changes that have been requested, this is what they will cost, we’re going to proceed unless you tell us not to, then fax it to the customer’s home office.
Within a month my client didn’t have any accounts receivable over 45 days old. Surprisingly, they also started to get calls from contractors that they weren’t previously able to get in to see. All because my client removed the surprise element from their dealings with their customers.
Drilling
This is one example of how numbers let us know where and when to drill so that we’re better able to resolve problems and identify opportunities for improvement. This time the problem was an industry practice. Other possible reasons for slow pay are:
- Morale issues: poor employee morale spills over into poor customer experience.
- Quality issues: resulting in customers missing their customers’ deadlines.
- Ill-advised sales compensation: results in emphasis on new accounts, leaving existing customers feeling unappreciated.
- Aggressive revenue growth targets: resulting in taking on poor credit risk customers.
- Lapses in, or missing, credit underwriting standards.
We wouldn’t have discovered the source of the problem had we not drilled down from what the numbers were showing.
Takeaways
When your numbers are declining, don’t fall into the trap of a knee-jerk reaction. Instead, drill down into the numbers to find the real reason why your numbers are declining. You’ll find that you’ll more quickly, and easily, reverse the trend and enjoy even greater results than you anticipated.
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If you’d like the leaders in your organization to learn how to use the numbers more effectively and/or dramatically improve the productivity of your workforce, contact me to learn more about these resources:
Resources
Making the EXCEPTIONAL Normal program helps you identify and nurture emerging leaders who elevate all around them to higher levels of performance and greater job enjoyment.
Financial Awareness & Strategy program where employees learn to identify opportunities to improve financial results and prioritize these opportunities on the basis of which produces the greatest impact with the least effort. Greater financial awareness = Better decisions.
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