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Granularity white paper
- 1. White Paper: The Power of GRANULARITY To Align Strategy, Performance, and Financial Outcomes www.FoundMoneyCFO.com © 2013 Steve Wilkinghoff
- 2. A Quick Word… When you have finished each month (or quarter, or year) you get your balance sheet and profit & loss statement. The problem is that, good or bad, your financial statements are completely useless as tools to drive you toward CREATING beQer, more dependable and more predictable financial results… At FinanIQ we work closely alongside our chosen clients and have the luxury of seeing and working with some of the fastest growing, and most dynamic, companies around the world. We bring our global experience to you, working alongside you and team to help create plans, execute them, and track, measure, and modify their progress toward them. You are about to learn how to get yourself and your team focused on the few numbers that are the TRUE drivers of your financial results and desired strategic outcomes. We call them True Targets. Others call them Key Performance Indicators. It doesn’t really maQer what you call them (although we think our name is more accurate) – the key is to read this white paper and learn how to use them to drive beQer, more consistent, and more predictable financial results! www.FinanIQ.com © 2013 Steve Wilkinghoff
- 3. Tons Of Numbers – Ounces Of Guidance… Your business is literally overflowing with numbers. There are the numbers given by your accoun^ng system; there are numbers to track your opera^ons; there are ra^os and benchmarks that are created from other numbers; there are forecasts, budgets, and variance reports. You’ve got a ton of op^ons when it comes to which numbers to look at. The magic is not what happens when you look at your numbers. The magic is what happens when you figure out what numbers you need to look at to drive your strategic plan and financial results. And what numbers (the same ones) you want EVERY single one of your team members to be aware of, to understand, to think about, to talk about, to work their absolute hardest to improve. Those few numbers are what we call your True Targets. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 4. Granular Targets – An Example Imagine you have set a strategic goal of increasing your gross profit from $400,000 to $800,000 (annual, monthly, quarterly – it doesn’t maQer -‐ the lesson is the same). You may think that telling your team members about that target, geeng them excited about it, even promising them a nice bonus if your business meets your strategic target would be a good way to drive home your goals, and mo^vate your team. You would be wrong! The problem is that most of your team members (in fact, not many business owners) truly understand how to CREATE gross profit – and therefore struggle to effec^vely drive it with clarity, predictability, and purpose. Gross Profit is simply an accoun^ng construct that has ZERO ability to direct you and your team to effec^ve ac^ons that drive you toward your strategic targets. Instead of selec^ng the revenue target as a Numerical Target, it would be much more effec^ve to granularize those targets… www.FinanIQ.com © 2013 Steve Wilkinghoff
- 5. Revenue Isn’t Revenue The first step in granularizing your targets is understanding three fundamental truths of financial results: 1. Revenue is NOT Revenue; 2. Direct Costs (or Cost of Sales) are NOT Direct Costs (or Cost of Sales); 3. Overhead is NOT Overhead www.FinanIQ.com © 2013 Steve Wilkinghoff
- 6. Revenue How Ojen Products Clients Measurement CreaYon www.FinanIQ.com © 2013 Steve Wilkinghoff
- 7. Direct Costs Ac^vi^es Team Products Measurement CreaYon www.FinanIQ.com © 2013 Steve Wilkinghoff
- 8. Overhead Ac^vi^es Team Processes Measurement CreaYon www.FinanIQ.com © 2013 Steve Wilkinghoff
- 9. CREATION of Financial Results Measurement www.FinanIQ.com © 2013 Steve Wilkinghoff
- 10. True Targets – An Example Back to our example. Instead seeng a revenue target only – suppose you drilled into that target and created granular True Targets. True Targets that would give each of your team members line of sight so they knew exactly what to do, whether they were helping drive your strategic and financial results, be able to track how well they were contribu^ng, and get excited about their ability to really contribute. It might look a lot like the table below… www.FinanIQ.com © 2013 Steve Wilkinghoff
- 11. It’s Obvious Now – to EVERYONE! With these Numerical Targets iden^fied and communicated to your en^re team, every single team member knows that the goal is to have a total of 5,654 paying customers within the next 90 days – each genera^ng an average gross profit of $86.34. And every one of your team members also knows the goal for the end of this year, next year, and the year ajer that. They have something tangible (as opposed to some abstract financial construct) that they can relate to – and that relates to how they view your business, their role and what they can do to help. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 12. Some Pointers For Se[ng True Targets… You MUST start by seeng True Targets where each team member knows exactly what each target means. True Targets are concrete, meaningful, and relevant to every single team member – irrespec^ve of their role in your business. Effec^vely using True Targets also involves you tracking these numbers publicly and sharing them with your team members. Good targets should be used as the founda^on for you to set your budgets, your financial forecasts, marke^ng plans, communica^on plans, expansion plans and so on. This is a departure from what most business owners are used to doing. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 13. Some Pointers For Se[ng True Targets… To have the best success in driving your strategic financial results you MUST hold off doing any budgets or forecasts unYl you have idenYfied your desired strategic results and determined the granular path to get there. Then your budgets and forecasts must be created to align with your strategic targets, ^melines, and goals. Finally, you MUST make a single person accountable for achieving each True Target. The person accountable is more than simply a “champion”, “cheerleader” or someone that will merely report on progress made. The person accountable for each True Target is the ONE person who is responsible for achieving that target (or intermediate target) within the ^meframe that has been set. They will involve other team members in your company and have many people helping – but they are ONE accountable for it. Failure to do this results in excuses and weak effort instead of progress – not cool! www.FinanIQ.com © 2013 Steve Wilkinghoff
- 14. Make Sure You Phase Your Targets Strategic targets almost always involved a longer-‐term planning and execu^on horizon (usually 3 – 5 years). While you will start work immediately on execu^ng tac^cs to start driving toward your strategic True Targets, their ul^mate accomplishment will most likely take a few years. To provide a bridge between where your business is at any given moment and your strategic and business goals it therefore becomes cri^cal that you break your long-‐term strategic True Targets into a series of phased targets that will march you and your team straight to your desired end result. Blending mul^-‐year goals (like doubling gross profit in the example shown earlier) and near-‐term targets that will provide mo^va^on, feedback, relevance, and urgency is what provides the “secret sauce” that makes crea^ng and using True Goals such a powerful approach in your business. Failing to do this creates high levels of frustra^on, confusion, and even resentment in your team. These emo^ons are triggered by the “too-‐large” gap between the present and the strategic True Targets without a clear view of a stair-‐step progression to get there. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 15. Make Sure You Phase Your Targets The longer-‐term your targets are, the less certainty you can have about the ability of your business and your team to achieve them. But by “rolling back” your longer-‐term targets into shorter-‐term targets (i.e. 1 year out, and then the next 90 days) you can have a fairly high degree of certainty about “stepping” your way toward your longer-‐term (and bigger target) confidently. It is emo^onally and psychologically destruc^ve to set grand, long-‐term targets without concrete short-‐term goals. Failure to set short-‐term goals that are in context essen^ally create a “pie-‐in-‐ the-‐sky” feel to targets that leave your team feeling unmo^vated, helpless, and demoralized. Experience has shown that the most effec^ve approach is to phase your overall strategic True Targets into, as a minimum, quarterly True Targets – although monthly has proven even more effec^ve and powerful. The best phasing interval for your business depends on the characteris^cs of your business, your repor^ng structure, your market, and your desired speed of execu^on. A set of grand and ambi^ous strategic goals, without short-‐term goals that are set within the context of the larger goals are WORSE than seeng NO long-‐term strategic goals at all when it comes to mo^va^ng your team and crea^ng beQer, more dependable and more predictable financial results. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 16. Do It For Yourself Now… Spend some ^me with your key team members now and set some strategic targets and then phased targets now. To make this work its magic for you, follow these simple rules: 1. Keep the total number of your targets to less than 4 (remember the concept of granularity); 2. Select targets that will be meaningful, relevant, and understandable to your en^re team; 3. Roll your targets back from your strategic targets to arrive at next quarter, next year, etc; 4. Iden^fy and assign one person to be the one responsible for achieving each target www.FinanIQ.com © 2013 Steve Wilkinghoff
- 17. CreaYng Your Own True Targets The best True Targets are almost always non-‐financial. The reason is that it simply takes too long for the impact to show up in the financial results. True Targets are measures of things that will CREATE a financial result, but tell you in advance if the financial result will be on target or not. By developing and using True Targets you can essen^ally measure what the financial results will be, in “real ^me”. That gives you the power to make changes if certain tac^cs or ac^vi^es are indica^ng that the desired financial targets will be missed if the status quo con^nues. Assume, for example, that a wedding photographer has historically booked 24 weddings each year. And assume that the business has historically received 20 phone enquiries each week from people looking to hire a wedding photographer. If the photographer booked 5 presenta^ons a week from the 20 enquiry calls the call conversion rate would be 25%. In other words, for every 4 phone enquiries received, on average 1 presenta^on would be booked. Call conversion rate is a True Target. It is a measure of how well the relevant result (geeng customers) is being accomplished. It predicts what the financial outcome will be and is therefore a leading indicator. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 18. CreaYng Your Own True Targets Let’s con^nue to follow this through to make it clear. We know 20 enquiry calls per week are historically received. Assuming a couple of weeks per year for vaca^on, holidays, etc. that translates into 1,000 enquiry calls per year. If the historical call conversion rate was 25%, that means the photographer would have about 250 presenta^ons over the course of a year. And we have already established that the photographer books 24 weddings in an average year (approximately a 10% booking to presenta^on rate). This process can be presented visually by thinking of a funnel like the one you see here… www.FinanIQ.com © 2013 Steve Wilkinghoff
- 19. CreaYng Your Own True Targets So, in other words, we know if the enquiry call conversion rate is 25% and the number of enquiries is 20 per week, that the business is on target to duplicate its historical sales revenue. How can that help the photographer improve the business and move it toward serving his strategic targets? Suppose each wedding nets the photographer $4,000 in profit. In an average year (where he had 24 weddings), he would realize a net profit of $96,000. Now what if the photographer’s strategic goal was to earn a profit of $124,000? If he maintained his $4,000 profit per wedding it would require him to have 31 weddings in the year (up from the 24 he historically did). So what does the photographer need to do? Should he run out and start adver^sing? That might work, but it might not. It’s also likely to be very expensive. By focusing on his True Target it’s en^rely possible that the photographer can achieve this $28,000 increase in profit. At NO, or VERY LITTLE addi^onal cost. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 20. CreaYng Your Own True Targets Let’s revisit the True Targets for this business. What are the 2 ways the photographer can get 31 weddings booked, without much addi^onal effort? All that needs to happen is one of the following: • Convert 31% of Enquiry Calls into Presenta^ons. This assumes that the 10% conversion from Presenta^ons to Bookings con^nues to apply, or • Convert 12.4% of Presenta^ons into bookings. This assumes that the 25% Enquiry to Presenta^on conversion remains the same. Experience has shown that both are surprisingly easy to achieve. It is really just a maQer of tes^ng different ways of handling enquiry calls, and of conduc^ng presenta^ons. But is tes^ng new ways of handling enquiries and presenta^ons risky? Not at all. That is, not now that we’ve created some True Targets www.FinanIQ.com © 2013 Steve Wilkinghoff
- 21. CreaYng Your Own True Targets Here’s why. Suppose the photographer discusses these True Targets with the team member that answers the phone, and handles enquiries. That person probably has all sorts of ideas that can possibly improve the conversion from 25% to 31% (likely significantly more than that). And by referring to exis^ng True Targets they can test each of those ideas, one at a ^me, over very short periods of ^me. These short-‐term tests against status quo are called micro-‐tests. If the team member tries a new idea for a week and it results in a Conversion rate of 27%, then that new way will become the new standard for how enquiries are handled. The next week the team member can try another idea and compare it to the new benchmark of a 27% conversion rate. If the test for that week generates a conversion rate less than 27%, it’s eliminated. If it creates a conversion rate higher than the 27%, then this new idea becomes the new standard. In this way it’s possible to try lots of small tests with minimal or no risk. Whenever a new test results in an increase in the exis^ng standard for any par^cular True Target, that tac^c becomes the new standard. Whenever a test generates a result less than the exis^ng standard you simply go back to using the baseline tac^c. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 22. Are YOU CreaYng The Financial Results You Want? Why is it that so many ambi^ous, hard-‐working, smart business owners have businesses that seem to struggle, produce inconsistent financial results, or simply go along being seemingly guided by “random” forces such as the economy, market factors, customers, compe^tors, and so on? One of the key reasons is the lack of a truly effec^ve and ac^onable plan to achieve strategic targets that maQer to the owners, their teams, and their management groups. Various studies have shown that close to 90% of all efforts at crea^ng strategic changes fail to produce the intended results. Our experience bears out the results of these studies. At BizDog Strategic Group, we started by helping our clients iden^fy clearly defined strategic goals. What we found was that, no maQer how good the strategic plan was, no maQer how mo^va^ng it was, no maQer how desperately the client wanted (or needed) the defined strategic outcome – they ojen failed to create anything that was close to those results. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 23. We Discovered The “Silver Bullet”… Ajer numerous clients where we helped create great strategic goals and plans, yet watched clients fail to achieve those outcomes we finally figured out the silver bullet. And it was like our eyes were opened anew. We were so excited. In fact, the founder of FinanIQ was so excited he wrote a book called, Found Money –Simple Strategies to Uncover the Hidden Profit and Cash Flow in Your Business. And his book and his excitement drew the aQen^on of “Mr E-‐Myth” (Michael Gerber) who offered to write a Foreword for the book and went out and got the book a publishing deal with one of the largest publishers in the world (Wiley out of New York). The Magic? Linking strategic goals to the financial results those goals define, and then rolling them back into the crea^on and tracking of True Goals that are understandable, ac^onable, and relevant to the way business owners, their teams, and their businesses operate on a daily basis. www.FinanIQ.com © 2013 Steve Wilkinghoff
- 24. Your Next Step… • Meet with us – get a FREE Business Diagnos^c and Breakthrough Session with one of our trained FinanIQ Consultants • Visit us at www.FinanIQ.com for addi^onal resources and thought leadership • Call (1-‐403-‐504-‐4918) or email us and request your free copy of our founder’s book, Found Money – Simple Strategies to Uncover the Hidden Profit and Cash Flow in Your Business. About FinanIQ Global Inc. We help privately-‐owned businesses create beber, more dependable, and more predictable financial results so their owners and teams can play a bigger role in their personal lives, their families, their communiYes, and the world. To learn how to implement the proven Found Money Strategic Framework, Process and Tools to create beber, more dependable, and more predictable financial results and transform your business potenYal into extraordinary reality, please contact us at: steve@finanIQ.com www.FinanIQ.com © 2013 Steve Wilkinghoff