JUNE 25, 2013
by Glenna Mileson
The morning after the Miami Heat won the 2013 NBA Championship by beating the San Antonio Spurs 95-88 in an intense game seven, most businesses in America were filled with post game discussion. Even the most casual fan probably knew the score. And those who study the game of basketball , could most likely cite dozens of facts, figures and statistics to explain how Miami came away with the win.
Business owners might consider studying their financial statements with the same sort of zeal that an avid fan would study game statistics.
For example, in that final game of the 2013 series, both San Antonio and Miami took 82 shots from the field. But Miami was able to convert at 43.9% (FTM-A) compared to 37.8% for San Antonio, a difference of 10 points (more than the seven points that won the game).
In a business, the conversion ratio of sales into gross profit margin tells a big part of the story about the success of the business. Yet, when I first start working with a business owner, I often learn that they are paying very little attention to their gross margin. They know sales volume and they know bottom line profit. But knowing the sales number without understanding gross profit margins is about the same as knowing the number of shots attempted in a basketball game without knowing the percentage made.
And while both shot percentages and gross profit margins can be measures of success, it’s not enough to just know these numbers. The most successful coaches and business owners find out the “whys” behind the numbers and work to improve them.
Let’s look at that Miami vs. San Antonio game again. For the 2013 season, San Antonio shot an average of 48.1% compared to that 37.8% in Game 7. If they had been able to convert their 82 shot attempts at their average rate, they would have put up 16 more points, enough to give them a win and the Championship. Why was Miami able to keep them at such a low percentage? Did the Spurs simply have an off night? Did they wear out? Was a key player in foul trouble? Or injured? Or, did Miami figure out the optimal match-ups and play exceptional defense? Through these kinds of details, the full story of the game is revealed.
Likewise, looking at the details tells the story in a business. If a $10 million business operates on a 30% margin, a decrease to 28% takes away $200,000 from the bottom line. Not many businesses of this size can find $200,000 in expenses to cut. Early detection of declining margins through study of monthly financial information gives business owners time to find problems and make corrections. Are suppliers increasing prices? Is there new competition putting pressure on pricing? Have the mix of low-margin and high-margin sales changed?
One of my favorite business books “Managing By The Numbers” by Chuck Kremer & Ron Rizzuto, makes this observation,
“Competitive Sports are indisputably governed by numbers. People cheer and yell and jump up and down just to see what team can rack up better numbers. And the activities we call business can be every bit as exciting as sports.”
Not all business owners are comfortable with digging through their financial statements to find the numbers they want and need. Not all accounting departments or bookkeepers know how to help owners analyze them. In those cases, it might be time to bring a CFO onto the team.