One of my mentees and AO subscriber writes in:
I’ve had a 12% decrease in weekly revenue so I’m keen to figure that out. I believe that’s my highest decrease in income since I started over 2 years ago. Hopefully getting some athlete agreements in place will help that.
Is this common around this time in business? What did you experience in the early days of AA?
There is no such thing as linear growth, as much as the goo-woos have you believe.
And every business goes through cycles.
There is a cycle of growth, a cycle of mess, and a cycle of debt.
Let me explain:
As a business grows (especially due to more customers), this puts strain on the system. Your infrastructure is pushed to its limit, and the systems you have in place start to falter.
Mess is created.
Things slip through the cracks, expectations aren’t met, and things are missed.
As a result, you need to repay the systems and infrastructure debt you’ve created before you can get back to growth (because debt is a liability).
Being able to accurately and efficiently diagnose your problem is critical for this. Otherwise, you’ll be draining all your resources fixing a problem that is a symptom rather than a cause.
This brings me to my point.
What got you here won’t get you there.
So whenever you’re trying to reshape, redesign, or rebuild your business, something needs to change if things are to change.
This was my advice:
I’d put that training agreement and contract in place ASAP. This time of year, parents make short-term decisions to optimise their life (like culling back extracurriculars like the gym now that sport is ramping up), at the cost of their long-term strategy for their son or daughter. It’s your job to:
a) Set expectations (input vs output and the time delay involved with physical preparation)
b) Have an agreement in place (minimum-term training agreements aren’t exploitative, they’re in your client’s best interests if the result is what you want to optimise for)
c) Continue to educate your customer (parents); they’re human too and forget, just like the rest of us, what the big picture is.
This also demonstrates exactly what I was speaking about yesterday.
If you don’t know how to accurately interpret what is happening in your business (by looking at the numbers like revenue and having a framework for translating numbers into real-world insights), you’re guessing what actions and activities will produce the result you want.
Knowing your revenue doesn’t tell you what the problem is. It’s simply the resultof your market activity (or lack thereof). Revenue doesn’t tell you how to act — it only tells you the results of your actions.
The same goes for profit. Low-profit margins are not the problem. It’s the symptom of the problem. Unless you can diagnose it and understand how efficiently you convert your revenues into profit, you don’t know whether you should cut back on expenses, fix a broken model, or replace your team.
Get my point?
This is why having a translation framework is so important.
You need to know how to translate the numbers on your P&L/Balance Sheet/Cashflow statement and know how to act (and if you have a business and AREN’T across this, then you need this more than anyone else).
In my portfolio of companies, this is what I’m always thinking about and looking at first:
1. ROE (return on employees). This is measured by revenue/wages for a given period. If you’re not exceeding 2.4x, your model is not working, and your management isn’t properly utilising the assets at your disposal. You HAVE to fix this first. This is the biggest problem for business owners in service industries right now (most people I speak to are less than 2x, which is why they feel f*cked).
2. Efficiency % (Profit/Revenue). This helps you understand how efficiently your revenues are turned into theoretical profits. If this number as % isn’t growing month on month, you’re business is becoming less efficient over time, and you run the risk of being a big business that makes no money (everything that comes in finds its way out).
3. Productivity % (OCF/Profit). If this % isn’t getting better monthly, then that tells me you’re over-capitalising on assets. Whatever money you’re making (your operating cash flow (OCF)) is getting pumped back into the business, building your balance sheet but not your wealth. I’d then ask why you keep re-investing in assets and how well they are utilised.
There are many more things to consider (especially what to do about these numbers if you find they’re unfavourable), but I’ll cover that in the Alley-Oop newsletter when it ships at the end of the month (including these free emails, so stay tuned).
Now, if you’re the type of business owner who doesn’t feel confident with this stuff, but you WANT to understand it and have a translation framework in your own hands so you can make the right decision when things go wrong, then you’ll want to subscribe here:
– Karl Goodman