The new magic number
Every business has its magic number—the one stat that assesses the health of the company. Traditionally these have been numbers like revenue, costs, and profit. But in our new era of big data, those tried-and-true magic numbers don’t tell the whole story. There is so much more that companies really need to know.
Today’s business environment is far more dynamic than it has ever been. Companies are moving ahead much faster than they did 100 years, 50 years, even a decade ago. But numbers like revenue and costs reflect what has happened in the past. You can’t be looking in the rearview mirror as you try to drive your business forward.
This is not a knock on those old magic numbers. They were the best measures companies had in the past, because companies did not possess the financial wizardry required to dig deeper into their data. The financial team was typically saddled with cumbersome tools. To do any kind of serious analysis, they had to pull data out of the general ledger system and into complex, expensive financial reporting software run by the IT team. Even for basic analysis, data was often put into spreadsheets, requiring finance teams to build complex equations and ensure the data was migrated appropriately from one spreadsheet to the next. Either way, it was an inconsistent, time-consuming, error-prone process that delivered incomplete results.
Today, however, there are modern, cloud-based financial systems that can quickly and automatically conduct these calculations and create insightful reports, enabling businesses to truly turn numbers into actionable insights. Here are examples of how companies in various industries can dramatically improve their business by discovering their true magic numbers.
In the hotel industry, the magic number has long been room occupancy. Is the hotel operating at 50 percent occupancy, 80 percent occupancy, 100 percent occupancy? Now savvy hospitality companies are starting to understand that the real magic number is revenue per guest. For example, are guests spending money while on the property? Are they using that coupon they received at check-in to get a 25 percent discount at the hotel restaurant? By looking deeper into the data—how many meals were served with that 25 percent off dinner promotion versus how many were served without the promotion—hotels can see what the uptick was and whether it was worth it to offer that promotion in the first place. By analyzing the data, they can discover what share of their guests’ wallets they’re capturing. And, ultimately, they can figure out how to encourage guests to spend more of their money inside the hotel instead of outside.
Private clinics are gaining popularity in the healthcare industry. I recently visited an ear, nose and throat clinic operated by a group of physicians who have several clinics in my area. One of the doctors told me their current magic number is overall profitability. Instead, what they should really be looking at is procedure profitability, doctor profitability and location profitability, rather than melding all those measures together. In these kinds of partnerships, there is always a concern that some doctors are doing more work than others. Maybe one clinic is doing the bulk of the business and the other two are struggling. Deep analysis of clinic data could guide a rebalance, indicating where specialists should be located and what procedures they should be offering.
Today’s software companies look very different than they used to. They’re no longer making one-off sales. Instead, they’ve joined the subscription economy. They sign up and renew their customers on a monthly or annual basis. Revenue is still a software company’s primary magic number, as it was before, but simply tracking revenue does not give them an understanding of where their opportunities lie or where there may be issues in the business. A better indicator is change in monthly recurring revenue. This has various components. How many new customers have been signed up in a month? How many have dropped out? What new services are existing customers adding? What is the cost of acquisition of each new customer? Before, software companies would just keep track of all the contracts flowing in from new customers to gauge the health of the business. But they will operate more efficiently and effectively if they leverage big data to look at the movement of many different benchmarks.
Say you own a small chain of restaurants. Typically, you’d want to track how much revenue you’re generating at each location. But this won’t tell the whole story. By going deeper into the data, you can test the success of menu tweaks and figure out how to improve your overall business. For instance, what if one location has a special on Tuesdays, offering a free salad with every chicken entrée? And all of a sudden the inflow of customers jumps 18 percent at that location? Clearly, that’s a promotion you’d want to extend to all locations. But that’s something you’ll probably miss if you’re tracking total revenue and not linking it to promotions at specific locations.
Aircraft leasing is an interesting case. The magic number has typically been the cost of maintaining planes in service. But what companies really should look at is not the cost of the overall fleet but the cost associated with each individual aircraft. Say you have Learjets, Sabreliners and Boeings. And let’s say your Learjets were the least expensive to purchase but also depreciate in value the fastest. And they have higher maintenance costs. Your Boeings, by contrast, were the most expensive to purchase but you get the most repeat customers on those aircraft. Instead of looking at overall fleet costs, you’ll be better off running a P&L statement for each aircraft. You’ll see the trend lines and have more comprehensive data at your fingertips, enabling you to make more strategic purchasing and operating decisions.
The true worth of accounting software for any business is in how well it supports your growth—and how well it uncovers your magic number. A modern, cloud-based accounting system can automatically make complex calculations and create eye-opening informational reports that shine a light not just on where the business has been, but where it is going. It allows you to create powerful reports and dashboards with a few clicks that help you rethink your magic number and position your business for future success.