I was sitting in a Chamber of Commerce meeting this morning…and can I just take a minute to say I am so excited to be part of the “fastest growing Chamber” in the area. It feels so GOOD to be part of something that’s growing! I want every small business owner to know what it feels like to be on that growth trajectory full of intention, optimism, and drive. Okay, so I’m in the meeting and they got to the scorecard part of the agenda. I totally geeked out. I looooooove a good spreadsheet and I get even more excited when it’s about goal setting and getting there! The timing couldn’t have been more perfect. As they walked through the goals and metrics I just kept thinking about the blog I had planned to write today. This was the perfect example of why knowing your revenue and expense drivers is so important! Let me explain…
Why do you care about revenue and expense drivers?
You can set goals for your business all day and you may even get lucky and stumble into them without this step. But who wants to stumble through business and life? Not me. I want to hold my head high, stare my future in the face, and know that my goal is inevitable as long as I’m willing to keep figuring it out! THIS is the figuring it out. Imagine a future where you know exactly what to expect in your financial reports because you know what actions you took this month and how they directly impact your sales and expenses. You save time and money because you know where to get the biggest bang for your buck (or hour).
You take control of your destiny by defining the path that gets you there!
That’s exactly what the Chamber did. They set a goal of increasing membership and they defined the path to get there. They asked themselves HOW they could increase membership. What are their revenue drivers?
What are Revenue and Expense Drivers?
Revenue and expense (cost) drivers are the activities that DRIVE your revenue or expense. I go into a little more detail in the Free Accounting Terminology Cheat Sheet but that’s the gist of it. I’m using the phrases (revenue and expense) together in this blog but these are actually two different but very similar terms/processes. When I work through this with clients, we identify the revenue drivers as part of the evaluation of revenue and the expense drivers as part of the expense review. The chamber membership goal is a great example of a revenue driver.
If you read the blog last week, you know all businesses have a combination of essential expenses, non-essential expenses, and expenses that are really not needed. Identifying the expense drivers that influence your essential and non-essential expenses is the next natural step to understanding and taking control of these costs. As a service provider, your cost drivers are often going to be marketing related. In a product based business, your cost drivers are often related to manufacturing or procurement. Ask yourself, what costs do you incur to generate revenue (essential or non-essential expenses)? What activities increase, decrease, or otherwise influence those costs?
Cost and revenue drivers are like Onions…
“No. Layers. Onions have layers.
Ogres <Cost and Revenue Drivers> have layers. Onions have layers. You get it? We<They> both have layers.” – Shrek!
Okay I modified the quote a bit 😊 but you get my point right? And I bet you think about your business the next time you watch that movie now!
How do you figure out the drivers?
So how do you peel back the layers of that stinky onion without all tears? We diagram the HOW of your business. You are going to ask yourself “how” until you run out of ideas and things to write. Confused? Let me use the Chamber membership as an example (this might be super helpful for those of you with membership based businesses too!)
- How do you increase/decrease revenue?
- Increase membership
- How do you increase/decrease membership?
- Increase visibility
- Get more members engaged
- How do you increase visibility?
- How do you get more members engaged?
Do you get the idea? It’s almost never a perfect triangle. You may have 3, 4, 5, etc. branches from one idea that you take to the next level. For example, you could increase membership by decreasing turnover aka people that don’t renew their membership. Not every “how” layer is going to involve increasing something. It might actually involve decreasing something.
Don’t stop at just 3 levels…keep going until you run out of ideas to influence the next action. Don’t just do one stream of revenue….think about ALL the ways you make money in your business. You are creating your roadmap to success.
The more ideas you write -> the more action you have at your disposal -> the more control you have over the goal you are trying to achieve
Want to take it one step further? Filter through all of the actions you defined and identify the ones with the biggest impact. These are your key performance indicators (KPIs). Start tracking their impact on your revenue and/or expense. Set quantifiable goals for these KPIs and work towards them!
If you read all the way through this and want someone to work one-on-one with YOU and YOUR COMPANY, I’m your girl!
Did you skim the whole thing, look at the pretty picture, and now you want to learn more? You can give me a call too!
Let me help create the path to financial success in your business!