The Most Important Metric of All....What Causes Sales?
Updated: Jan 8, 2019
Top CEO's always want to be sure their metrics are measuring the right things, but they know that most metrics measure what's already happened. What metrics are there that help us foretell, as best possible, what's coming at us, what we should be preparing now for, so that we can best take advantage of it?
What causes sales is different in almost every business, but you and your senior management team can figure out what it is! Once you do, you can move toward controlling your sales growth and your profit destiny for a long time.
Get your team together and brainstorm what really causes sales in your business. Focus on moving back up the chain of events that leads from booking the sale to lead inception. Find the step that you can manage (like number of salespeople, if that's what really causes sales), but make sure it is a step that enables you to measure and control it reliably and consistently. Those elements are really important! For example, for a lawn mower manufacturer, its customers need to mow, which is driven by rainfall. So, when does the rainy season start in a locale? Time your promotional efforts prior to and during the early part of that time. A commercial printer, on the other hand, needs to respond to the needs of customers who react well to technical sales people, so have as many well-trained salespeople as justifiable. The obvious key to your discussion: Look for the "cause" of increased sales, and then find the source reason driving that.
Once you've identified the "cause," make sure you are tracking the key metrics to let you know what is coming.
First, convert all of your charts to a Trailing 12-month, to eliminate seasonality. Make sure that UP is ALWAYS GOOD, and DOWN is ALWAYS BAD. That means to use the "inverse" when calculating the numbers for indicators where "down is good" (ex. cost/unit). The key to making/saving money, however, is that the MONTH that you see it go flat or down, REACT!
Second, on one page, publish five trailing 12-month charts: Net Sales, Gross Margin, Operating Expenses, and Net Income...AND at the top of the page "WHAT CAUSES SALES!" When you look monthly at these charts, you will instantly see whether you are reacting quickly to problems to maintain Net Income! You will know the action that causes sales and how many occurred in the last period, the result in Sales Dollars, the resulting Gross Margin, the resulting Costs, and the resulting Profits. Be sure to set a schedule for re-forecasting so that you are comparing what you have already forecasted with what's actually happening, and make quick adjustments.....sooner than your competitors.
Third, create a Five-Year Trend indicator page. For all of your key indicators, especially the ones that Cause Sales, develop a page with the Trailing 5 Years, plus your forecast. Make sure the forecast seems reasonable. Most importantly, have COMPLETE ACTION PLANS for making them happen, including assignment of responsibilities. If you don't, your strategy is HOPE. Review your actual results against forecast on a monthly basis and make adjustments.
Fourth, Cash Flow Forecasts. ALWAYS BE DOING THEM! For example, if you are currently offering terms of 1%, 10 days, consider offering a rebate of 1% for paying within 10 days. Then, send them a check that is clearly marked "Rebate.". More powerful! In tight times, large companies stretch payments. Can you survive that? Plan how you might react.
WGMGD: What Gets Measured Gets Done! Set goals jointly with your people. Communicate, build trust and track and provide feedback on interim results. Simple tools that when maintained timely and accurately, can be powerful for the effective management of your business. Plan, Execute, and Succeed!
Kramer, Kraig. "The Most Important Metric of All: "What Causes Sales..."."
TEC Update 1.Jan-Feb (2014): 2-3. Print.
Jayne McQuillan, CPA, MBA, CEPA is a strategic management consultant, and the owner of Journey Consulting, LLC, in Green Bay