Today’s companies MUST use data to analyze trends to stay competitive and manage growth effectively.
But how do they do it?
The term Big Data has been coined by many economists as having transformative powers for many large corporations. Amazon, Facebook and Google have been able to transform and even merge industries by compiling, analyzing, and utilizing data. The outcomes can be seen in the form of intermarket acquisitions, hyper-targeted advertising, and integrated product launches.
The analysis of these datasets can be an incredible tool for large companies with multi-billion-dollar market capitalizations, but what about those small-to-medium-sized-businesses (SMBs)? How can this market size benefit from the same data focused trends?
Jeff Bruno, Trilogy Alliance Partner and CEO of Your Outsourced CFO, agrees that all businesses today are extremely sensitive to the data we monitor and how the correct metric analysis is critical.
Big Data steals the spotlight these days, but SMB owners can still ride the data wave by utilizing Small Data, identifying what Trickle Down Metrics© drive their business, and using them both to help achieve short and long term goals.
The Definitions: Small Data vs. Big Data
Big Data is defined by the volume, variety, and velocity of the data being collected.
Small Data is defined as well along the same lines.
The outcomes of Big Data and Small Data are to provide impactful insights, however at very different scales (corporations vs. SMBs). The key for an SMB owner is to be able to clearly identify what Trickle Down Metrics© are the most critical drivers for their business and to focus their limited resources on monitoring the right metrics for the right outcomes.
Trickle Down Metrics©
The Trickle Down Metrics© of a company are the metrics that permeate throughout all aspects of an SMB and which drive the company towards the ultimate goals of the CEO and/or organization.
The CEO or Organizational goals can vary wildly while discovering their Trickle Down Metrics©:
1) Target the Trickle Down Metrics© derived from the WHY
2) Identify Supporting Down Stream Metrics, 3) Collect Data, 4) Monitor Outcomes, 5) Take Action, 6) Repeat, 7) Grow
Information = Power that Drives Growth (See below)
Consider ABC Company, an application development company that creates custom software and applications for SMBs at a fixed fee rate. The CEO has built the company up to $2MM in revenue and $200K in annual net income within a few short years with grit, direct sales, and gut calls. The CEO would like to expand his team and diversify product offering within two years by increasing revenue, maintaining or increasing profitability, and reinvesting those profits into the new revenue channels.
ABC Company Trickle Down Metrics©
The CEO expanded his or her direct labor force in anticipation of revenue growth, hires a VP of Sales and a Sales Administrator to increase revenue of main product and test market for new offerings, and installs a new project management software in preparation for hiring a project manager.
The CEO grows revenue to $2.8MM within twelve months, but sees profitability decrease to break-even levels. The CEO was correct in assuming he needed more direct labor ahead of the increase in sales and successfully avoided the issue of a contract backlog, but twelve months later, even with revenue up to $2.8MM he has no profits to reinvest into new revenue channels. Even worse, he does not know why his actions resulted in some wins and some losses.
Operating WITH identifying the Trickle Down Metrics©:
The CEO analyzed billable versus non-billable labor hours exported from the billing software and found that his Utilization Rate of Direct Labor was around 90%, higher than industry average and an indicator that they would soon be overwhelmed. The CEO used this knowledge to confirm his decision of hiring new direct employees.
The CEO then hires a VP of Sales and a Sales Administrator hoping to increase Billed Revenue and keep his new direct employees busy! The two new hires spend six months closing an acceptable number and revenue level of deals, however they were incorrectly projecting how many hours of labor the projects would require and thus had been miscalculating the fixed fee contract.
This pricing error began to eat into gross profitability of individual projects and the smaller projects weren’t even profitable at all! However, by monitoring the issue over time, the CEO was able isolate the issue, why it was occurring, and take action to correct it before it worsened. The CEO decided to hire a project manager sooner than originally planned to handle the estimation duties and keep labor costs down.
Billed Sales had increased overall to $2.8MM, but they lost slight profitability in the short term due the estimation issues. Outside this slight bump, they are now on track to continue growing towards the CEO’s goal of maintaining profitability and reinvesting excess cash into new revenue channels.
What is your Trickle Down Metrics©??? The Team at Your Outsourced CFO is happy to discuss!
Your Outsourced CFO helps the modern CEO strategize for growth, while continuing to manage critical financial processes monthly, quarterly and annually. We act as your executive sounding board and work with you through every major decision to help achieve growth milestones.