That’s what you want.

 

Business advice is no good when it doesn’t solve the right problem.

 

So when you hire a business consultant you expect at least two things:

First, that they know how to figure out what the fundamental issue is; and

Second that they know how to fix it.

 

When I’m asked to take a look at someone’s business and tell them what I see, there’s a handful of metrics and numbers I look at first. Looking at these numbers gives me an idea about what other information I should request; how deep I need to dig; and where I should dig first.

 

Whether you’re working with a banker, Marcus Lemonis, or a business consultant, they’ll all take you through these questions in some fashion.

 

For folks that haven’t done it often, It can seem unorganized, yet there is a method to the madness. The answers to these questions are usually discovered conversationally and not in any specific order.

 

Small business owners are often curious about why I ask for certain information and what I expect to find. One thing I’d like to say here is that when I’m looking at the numbers and metrics for a given business, I don’t expect to find anything…

 

I expect the metrics and numbers to begin to tell me the story of your business.

 

So I thought it would be useful to walk you through those numbers and why I start where I do. I’ve divided he numbers and metrics into five major categories for discussion purposes: people, product, process, finances, and clients. In practice, the questions aren’t asked in any specific order.

 

In several cases I’ll look at the trends as well. Looking at a single data point would be like looking at only one brush stroke on a Picasso. You don’t get the whole picture.

 

This is a brief list and often leads to many more questions about the business that are specific to your business’ situation.

 

As I discuss each one I’ll explain why the metric or number is important and which additional questions it might lead me to ask.

 

Lastly, the vast majority of these questions are internally focused on your business. I don’t start with the industry. I start with the business itself.

 

your metrics, numbers, and trends help you understand what’s happening in your business. It’s common that I find a result that’s different than what the business owner knew it to be.

 

Do yourself a favor, don’t glaze over any of these numbers and assume you know them. If necessary, have your accountant work them up for you to start. Then double check their approach to be sure it’s correct and that both approaches agree.

 

People

When I take a look at the people side of a business I’m looking to gage how strong the team is. How long they’ve been with the company and how much experience they have with the company.

 

I ask for a few numbers in this category:

1) Total headcount.
2) A list of all the employees that have left the business in the last 24 months.
3) The employment stop and start dates for current employees and the previous employees named in question 2 above.

 

 

Do you have a team that’s been around a while? I want to see how good or bad your employee turnover is…

 

I often look at the core production team’s age (how long they’ve been together). I’m interested in how long they’ve been doing things your way as a team. Your core production team is that group of folks that has the greatest impact on the quality of your product (and therefore part of your client’s satisfaction) and the efficiency of your process – exclusive of whether or not you have the most efficient or best process around.

 

Through years of observation I’ve seen that it takes a person about 2 years to master their role in a given business. People who have similar prior experience in another company can master the role in your business faster, but there is still a lag time…

 

The reasons for this lag are twofold…

 

First, the processes and culture in your business are unique to your company. So there’s a learning period for someone to get used to how you do things.

 

Secondly, there are things that happen and problems that pop up. Some of these things don’t happen very often. They happen so infrequently that the first time they happen it literally takes a person hours to figure out how to deal with it. But the next time they see it, it’s a 15 minute event because they’ve mastered it.

 

I want to know how much mastery you have on your team.

 

 

Numbers only tell one part of the story. I’m looking for anecdotal evidence as well.

 

If I were walking around in your offices, one of the things that I would look for would be personal effects belonging to your employees. Things like pictures and knick-knacks. It may seem like a little thing, but it tells me a story about how engaged your employees really are, and how long they intend to stay with you…

 

 

The least engaged employees often have no personal effects…

 

The one caveat to this is new employees. It takes a new employee a few months to settle in so don’t expect to see personal items at their desk on day two.

 

Something I might take a look into is your approach to hiring. Are you good at hiring, but not so good at keep people; or do you need to learn how to hire? Food for thought…

 

Process

When I take a look at the processes in a business, my initial interest is in the answers to three questions:

1) How many can you make or serve versus how many do you make or serve?
2) How fast can you make or serve them?
3) What is your reject rate or waste?

 

With questions 1 and 2 I’m doing a quick, back of the envelope capacity analysis. What is your capacity for helping clients. How many can you make and how fast do you make them. Ultimately, I’m looking to see how much top line revenue you can make with the resources you have in your hands.

 

If you’re limited by capacity, that could be a problem if we ramp up the sales side of your business. If you’re not limited by capacity, that’s great! There’s room to grow without spending more money on capital equipment or space.

 

 

Anecdotally, if I was walking around in your business, I’d be looking at how confused your process was. Where are people bumping into each other? I might do a process analysis or time study. Do you have long lines of customers, or wait times between steps that you know are wasteful?

 

Waste doesn’t just come in the form of material in a dumpster. Often times it’s laying around a business in the form of wasted time. Figuratively, you could sweep money off the floor by fixing the places where you’re wasting time.

 

 

When I look at your hard waste or reject rate, I look at it from a few angles and I’m folding in what I’ve seen in the numbers with regard to your team…

 

First, what does this have to do with the tenure of your team? Maybe your employee turnover is high and that’s showing up in your waste. Maybe your process is so broken that people can’t stomach working there so they leave fast.

 

 

Or, maybe your process is broken and you have amazingly dedicated employees who’d walk through fire for you! This starts to tell me something about your company culture…

Product (or Service)

When we look at your product or service we’re looking to see what you’re selling, how it’s performing, and is there room for improvement. I start with three questions:

1) How long have you been providing these products/services?
2) By product or service line, what are the profit margins, revenue, and volume for each – for the last three years?
3) When is the last time you launched a new product/service?

 

When I look at the first question, I’m gauging both the staying power of the product in the market and your experience with making and selling it. That single number isn’t enough though to really gauge how the product is doing so I dig deeper with the second question…

 

 

This is where we start to see how well specific products and market segments are doing…

 

This one question can lead to a whole host of second level questions. By looking at these numbers I can see whether or not a specific offering is picking up steam, or possibly losing market share, or get a bit of a glimpse into what your sales efforts are producing.

 

I would anecdotally compare what I know about your product or service to see if there was an opportunity that was being missed. For example, can I quickly name several other competitors in your space that are doing well competing against you with this particular offer?

 

If your competition is doing well, then that would lead me to evaluate both the overall quality of your product and your sales efforts.

 

And I want to know which of your products and services is making money and losing money, and why.

 

 

I firmly believe that if you build up your price based on your underlying costs and you obey that discipline, you will always make money when you sell. This belief assumes that your costs aren’t out of line with the market.

 

From these initial numbers, I’ll dig deep to find the answer to why certain offerings are doing well, and others are not. The answer to this question tells me a lot about your business model and your offering…

 

The last question tells me a bit about your interest in innovation, diversification, and growing your business. It tells me whether or not you take time to find the opportunities in your business and diversify your offering…

 

 

By taking a look at your most recent product or service introductions, and whether or not they’ve succeeded, I start to get a feel for how you manage your business.

 

Clients

I have several questions about your client base. These questions allow me to understand, in more detail, the strength of your offer and your brand.

 

The answers to these questions start to paint the picture of whether or not your clients love your product and how much they love it. And so I start with six questions:

1) How many clients do you have?
2) Who are they, and what market segments are they in?
3) How long have they been with you? Why?
4) What’s your profit margin on each client?
5) What’s your sales backlog?
6) What’s your new business win rate?

 

The first question is here because we need to know how diverse your client base is. A narrow client base is a recipe for risk and suggests that you have some work to do to make your business recession resistant.

 

 

Add in question number five and we really start to define the risk and opportunity in your client base. The goal is to never lose money on a client. To really understand your situation with each client, you’ll be looking at gross margin and net margin by client.

 

Then I want to know who your clients are. What market segments they’re in and who do they serve if it’s a B2B situation.

 

 

By asking how long they’ve been with you and why, I start to get a feel for what the business drivers are from the client’s side and whether or not you’re in touch with who your client is and what they see in your brand.

 

Understanding your client is very important if and when you’re going to make changes in your business. If you remove something they love, you’ll pay dearly for that misunderstanding. Conversely, you could add something that was missing and really grow your business.

 

 

On CNBC’s “The Profit”, you’ll notice that Marcus Lemonis really works to understand the answer to this question, AND whether or not the business owner understands the answer to these questions.

 

 

It is impossible to force an offering into the market, so I want to make sure I’m developing an understanding for your brand and why your clients do or don’t like it.

 

 

Lastly in the client category, I want to know what your batting average is when you have the opportunity to win new business.

 

By asking this question I start to circle back on your understanding of your client; I’m digging into your sales process; and I’m picking up some more knowledge about your product and how well it solves your customer’s problem.

 

 

This question is important because it helps add clarity to many questions in other areas of your business. Maybe you’re great at adding clients at a great profit margin but they only hang around for 6 months…

 

Looking at those kinds of scenarios again fills in more of the picture about what’s going on in your business.

Finances

Just like The Profit, I look at these last. Yes, we’ve asked many questions of a financial nature along the way, but now we’re going to sit down and dig deeper on the issues related to the financial management of your business.

 

And so I have five questions that I lead with in this area:

1) What are your Revenue and Net Profit for the last three years?
2) How much is the business owner’s compensation? (And how is it built up?)
3) How much Total Debt does the business have? Both on balance sheet, and off balance sheet debt.
4) How much available credit does the business have?
5) What are the Cash and Receivables balances?

 

The answer to the first question is simple. And it’s asked for a couple basic reasons…

 

Are you making money, and are you making the kind of money you should be making?.?.?…

Here’s a common business owner brag, “I have an awesome accountant! He’s got me set up so that I haven’t paid taxes for the last (pick a number) years.”

 

When I hear a statement like this there are all sorts of questions that fire off in my mind…

a) Have you put any money into your retirement account during those years?
b) Is there enough cash in the business for you to withstand 60 days of problems collecting on your receivables?
c) Have you put any money into your children’s college fund during those years?
d) Do you have enough cash on hand to take advantage of a business opportunity if it presented itself?
e) How much unneeded “stuff” have you bought for the business at the end of the year to avoid paying taxes?

 

Having no net profit at the end of the year is very seldom a good thing. Managing your business to avoid paying taxes is a fatal flaw!

 

Or maybe you haven’t had to worry about paying taxes because your profit margins are bad to begin with…

 

On the surface, the profit margin question is pretty basic, and it’s the reason(s) why that I’m really interested in.

 

Then I dig in to the business owner’s compensation…

And business owner compensation comes in many forms…

 

I’ll dig in and find out about the gas card you have that the company pays off every month, or whenever it has the cash. Does your wife have a gas card? How about your children?

 

Are you and your spouse driving around in private vehicles that the company is paying for? If you had a hired General Manager would you allow them this luxury?

 

What about the vacations disguised as business trips?.?.?…

 

Are you taking a draw or paying yourself a paycheck? The difference is the difference between a painful IRS tax audit, and never hearing from the IRS…

 

There are many things that you’re allowed to do with our tax code. That doesn’t mean that it’s good business to do them. And I’m looking to see what’s driving how you financially manage the business. Keeping real profit, or not paying taxes…

 

If you fall into the description that I’ve just run through, I’d firmly suggest that you simply start paying yourself the amount that you’d pay a hired general manager or CEO, and manage your personal expenses through the salary that you earn.

 

After that, we need to look at your debt picture. It’s common to find off balance sheet debt in small businesses. This sort of debt usually comes about for one of two reasons:

1) It’s either leftover from loans you got from family and friends to start the business, or
2) Your business got into trouble and you went and got a loan from family, friends, or both.

Either way, I want to see all the debt and I want to understand where it came from and why. It all has to be paid back.

 

This dovetails with your available credit lines. If you don’t have much cash on hand and you’ve borrowed to the limit from friends and family, then I’d like to know if you have any formal credit left to borrow against.

I’ll convert the available credit, cash balance, and accounts receivable into a number that tells me how long the business can run if it didn’t sell another product or day of service.

To do this, I’ll also need to know how good you are at collecting on your accounts receivable. If you have a problem collecting, is that because of how you do things or are your clients having a problem too?

 

The Bonus Question

Throughout the process of finding the answers to all of these questions there is one HUGE question that I’m looking for the answer to…

 

How are decisions made in this company?

 

 

The answer to this question hits on a lot areas in the business…

 

The answer to this question tells me about the leadership style in the company. Are employees mircromanaged? Or do they have the freedom to think, grow, execute, and make mistakes…

 

It tells me about the culture and gives a little more color as to why your employees are loyal, or why they leave quickly…

 

Coupled with what I learn about your processes, I may find that one person makes all of the decisions and has chosen to be the bottleneck in the business by interrupting otherwise good processes…

 

Maybe nobody makes decisions, or a very small number of key players are always locking horns on decisions, again slowing the business down.

 

Sometimes there’s a void. I have come across situations where the person who has ownership control doesn’t lead nor do they select someone to lead.

 

Ultimately, businesses aren’t democracies. Someone must make the decisions. A trait of a good leader is that they know how to listen to several perspectives and once they’ve listened, they make a decision and move the organization toward a goal.

 

Good leaders don’t make every decision; rather they hire good people and get out of the way. They know how to let others do what they do.

 

In Closing

There are many questions to ask when sizing up a business, determining how healthy it is, and figuring out where to start first. These are just the first 21 questions, but as you can see, they are targeted at figuring out what’s going on in your business.

 

When someone like The Profit, a buyer, a lender, or myself goes into a business they will start with these 20 questions to gain an understanding of what’s going on.

 

If you have any questions, post a comment below and let’s start a conversation.