Help, we need more customers

One of the best ways to really understand financial results and what’s possible in the way of improvement in your business is to look at what drives results. What are the relatively small number of key drivers of your financial success? And a key driver is not necessarily a financial measure.

Linking activities or drivers to their impact on your bottom line is an incredibly effective way to manage and improve your results.

Let me show you an example that clarifies what I mean by non-financial drivers of results and how powerful they are when linked back to the decisions you make each day to improve profitability and cash flow. It also shows you the power of having the key drivers and measures of performance at your fingertips to help you make smart decisions as you grow your business.

A powerful example

I was doing some consulting work for a multi-unit retail chain and one of the problems upper management had was a lot of the stores were coming up short of their sales goals.

Comparable store sales are an important metric in retailing, and the numbers had been good for several years but had been falling off recently. They were worried about it, so they asked the store managers “what’s going on”. And the typical response was “help, we need more customers”. Corporate needs to provide us with better marketing to drive customers in to the stores or this problem is going to get worse.”

The management at corporate knew they had a problem. They knew they had to do something. But the marketing budget was tight and they were uncomfortable just cranking it up and blowing the budget.

And they also had a nagging feeling something wasn’t quite right in what they were hearing from the store managers.

Step 1 is get the facts

My first step was to create some visibility and transparency around the problem. Oftentimes the real drivers behind poor results are not visible. You have to peel the onion a bit to get the facts. You have to create visibility and transparency so you can see and understand what’s really going on.

So I looked at a couple of the basic drivers of sales. It was basically number of customers and average ticket. Average ticket was pretty consistent over the last year or so.

Number of customers was down some though. So, on the one hand that supported what some of the store managers were saying about “we need more customers”.

Then I got to some interesting information. I separated customers by whether they were new customers or repeat customers.

This is what I found. The number of new customers making a purchase looked good and hadn’t fallen off.

But look at the number of repeat customers. It was going down. The problem at these stores was that new customers were coming in and buying, but for some reason, they were not coming back the way they had in the past.

And repeat customers spent more than new customers, so they had a “double whammy” negative result on sales. This created one of those “Ah ha” moments for management because now the action needed to address the problem was not what they thought at first – more advertising and marketing dollars to get new customers.

Their job was to find out why existing customers were not coming back.

Maybe some customers had a bad experience, maybe service was bad. It could be a number of different things, most of which are centered on the customer experience in the store and during and after the sale – not a marketing blitz to get new customers.

In fact, driving a bunch of new customers in the store while the percentage of repeat purchases is dropping and can’t be explained could be a very costly mistake.

Visibility and transparency makes you smart

Knowing the basic drivers and sub-drivers of each component of cash flow and having good visibility into those metrics helps ensure you make smart decisions as you grow your business.

Do you have the key drivers of profitability and cash flow at your fingertips?

Philip Campbell is an accounting and financial consultant and author of the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore.