Without an understanding of how to read a map, they couldn’t figure out where they were, so they lost a lot of time and ended up with a strike.
The equivalent for our businesses is that if we don’t know our numbers, if we don’t know where we are with our business right now, it’s incredibly hard to make any progress toward where we want to be.
An example might help:
A filmmaker friend decides to leave her job where she has been making $40k per year as an employee, because she believes that she can make $40k per year as a freelance filmmaker instead.
She goes out and does well, finding a few jobs a month that equal about $4,000, and ends up making $48k for the year.
But because she didn’t understand things like overhead, taxes, operating expenses, and what it cost to produce the projects she was working on - rental fees, subcontractors, locations, food, etc… - her take-home pay for the year was actually $28,800, nearly $12,000 less than she was making as an employee.
An understanding of her numbers and how her business operates going in would have saved her a ton of frustration with her results.
Now… this principle also applies to those that are looking to grow their businesses.
The numbers involved here are things like average order value, cost to acquire a customer, return on ad spend, lifetime customer value, and profit margin.
Why? Well, let me ask you another question:
Is it possible to increase sales, but lose money?
Believe it or not, it’s surprisingly easy.
Say you make a product that costs $10 to make. You then put it up on Etsy and sell it for $20 plus shipping. You realize that the product weighs more than a pound when you ship it, so it will cost $13 to spend. You aren’t getting any sales because of the high shipping, so you make shipping a flat $3.
Now your cost is $23 ($10 for the product and $13 for the shipping) and you’re charging $23 to the customer.
You made $0 on the sale.
But, you have bills to pay…a friend you pay $12 an hour to help you with shipping. Your office space, internet, and other expenses.
You start selling more and more, so you have to add more people to help with the production and shipping.
A bigger office space.
More overhead and expenses…
See how more sales in this situation could be a bad thing?
So before you decide that you want to grow your business, you need to know your numbers to ensure that you’re actually growing, not just growing because it’s cool.