Stop Operating by Feel (part 2): What Numbers Do I Need to Know?
This is Part 2 in a series about numbers and how they relate to operating a product business. In Part 1, we talked about why knowing your numbers is so important. In this session, we're going to explore what numbers you need to know.
The Goldilocks Principle
I received some great feedback on the article I wrote last week entitled "Stop Operating by Feel: Why Knowing Your Numbers is so Important". A common theme revolved around two situations with the same question:
#1 Things are going great! I haven’t run my numbers. Which ones are important enough for me to know?
#2 Things are going great! I'm drowning in numbers. Which ones are important enough for me to know?
Interesting that #1 and #2 produce the same question. (The Goldilocks Principle, perhaps?)
Let's discuss the two and then dive into, well, the numbers.
Situation #1 is a solo-preneur -- let's call her Ruth -- whose new product was launched 6 months ago and is showing signs of strong product-market fit. Sales are robust and cash is coming in. Money is tight but she's looking to issue a new purchase order for 5x her original buy. Scary. Ruth is responsible for product design, purchasing, sales, suppliers and helps pack orders each week, too. She’s busy, to say the least. She knows what she paid for her last batch of products, but isn't quite sure of the cost of everything else that goes into getting her products to her customers...and therefore, doesn't really know her numbers.
Situation #2 is an experienced operator -- let's call him Orville -- who runs a bustling 50,000 square foot warehouse shipping a few thousand orders per month. He's responsible for an ops team who receive inventory then pick, pack and ship orders. He has access to all of his raw numbers (items picked, orders completed, labor costs, hours worked, shipping charges, returns processed), in addition to his internal business intelligence software which has a myriad of graphs and reports. He's always looking for ways to improve efficiency and save money, but he's overwhelmed by the amount of information he has access to...and, therefore, doesn't really know his numbers.
These two scenarios both are typical of high-growth eCommerce startups at different stages of their life-cycle…yet they have the same problem: Top line revenue is growing nicely but they’re not sure if gross margins are able to support the business on their own merits, i.e. , without injections of outside capital. So, let's cut through the fog and try and identify the key metrics we need to know as operators to understand our COGS (Cost of Goods Sold) and arrive at Gross Margin.
Assuming you don't manufacture your own products, we have:
Cost of Materials (what you pay to arrive at a finished product)
Easiest: you source your product from one vendor and receive a finished good ready to ship
Harder: you need to perform a value-added service to your product after it arrives
Hardest: you use multiple vendors that add cost and value along the way
Cost of Labor (what you pay to get your product to your customers)
Easiest: you use a 3PL (third-party logistics) partner to ship your orders
Harder: you fulfill orders yourself
Hardest: you fulfill orders via different channels and end customers
With some exceptions and specific business complexities, that's really it. Simple to understand, harder to execute. Why? I’m gonna place blame on good old Father Time.
I know first-hand how difficult it is to allocate the time needed to focus, gather and calculate these numbers on a regular basis (monthly preferred, quarterly at the very least). Day-to-day firefighting almost always takes center stage. After all, if you can't get your products to your customers today, you may not have a business tomorrow.
When I was a startup operator myself, I struggled to understand my numbers. As an Industrial Engineer, I was trained how to observe, analyze and improve systems and processes. MORE, BETTER, FASTER as we used to say. It's been ingrained in my ethos for a long time and something that comes naturally with years of experience. However, it's not enough to feel like you're running at your best, but that’s pretty much what I used to do. We moved fast and broke things, but the wheels stayed on the bus and we grew without ops slowing us down. However, if I could do it all over again, I’d spend more time on my numbers. I know it would have made me a better operator.
Crunching The Numbers
It's been an interesting transition to the world of consulting because we are, for the most part, removed from day-to-day firefighting and focused on high-value improvement projects for our partners. This allows us to spend quality time on observation, analysis and reporting on exactly what numbers are needed to determine the performance of any given operation. I see now, how valuable this can be. It allows us to provide guidance on how to improve operations backed up by hard numbers, not just feel. This adds an essential layer of confidence to decision making for the future.