How does a company go bankrupt? Slowly at first, then really, really fast. It’s exactly the same way individuals go broke, gradually, then really quickly.
Unfortunately, people often miss the early warning signs. In my experience it’s often because they’re focused on lots of numbers, instead of just a few. Here are two examples:
Example #1 Dashboard Inertia
I was working with a client who was trying to dramatically increase new business. Current sales were up, but their sales dashboard, the system they used to measure sales activity, was starting to show a few pockets of yellow. For those unfamiliar with a dashboard, green means the numbers are all OK, yellow means danger zone, red means things are about to go off the rails. This client’s dashboard tracked twenty different activities. The ones measuring prospecting were starting to go yellow.
But the sales team didn’t seem concerned. They kept talking about all the deals they had in the pipeline. Every day they were getting little pings of yellow on their dashboard, but they pretty much ignored them.
It’s not uncommon for employees to ignore company created measuring systems. The more complex the system, the more likely people are to ignore it.
I knew it was time for a yellow pad exercise. I had the VP of Sales ask each person to write down their quota, and their average close rate, and then figure out how many opportunities they needed to be working. For example, if you need 100 sales, and your close rate is 25%, you need to be working 400 opportunities. It’s three simple numbers.
That’s when the, Oh sh..t moment occurred. Every single sales rep realized they didn’t have enough opportunities in the pipeline. The dashboard had been telling them that for weeks, but it took each rep figuring it out for him or herself on a yellow pad for them to internalize the information. Once they internalized it, they began to rectify it.
I first learned the value of the yellow pad exercise from my uncle, who’s a lawyer who deals with bankruptcies. He says, “You can look at spread sheets all day, but a few simple numbers on a yellow pad will tell you whether you’re going broke or not”.
Example 2 – Personal Death Spiral
I was helping an entrepreneur friend of mine reorganize his finances after a divorce. His spread sheets for tracking finances, had hundred of numbers on them.
I got out the yellow pad and asked, “What are your average business expenses every month? What are your personal expenses? What’s your average monthly revenue? When he wrote the numbers down, he was shocked to realize he wasn’t making enough to cover the basics. Every month things slid over into the next month, what felt like a constant game of catch up, was in actuality a slow spiral towards going totally broke.
Prior to the yellow pad moment, he thought $12K a month in revenue would keep him afloat. When he looked at the math on a yellow pad, he realized he needed closer to $20K a month just to stay afloat. The yellow pad lit a fire under him that months of scrambling for money had not.
The yellow pad exercise strips away the complexity, and makes your financial situation clear. Spreadsheets provide answers to many financial questions. But if you want to know whether or not you’re spiraling towards broke, get out a yellow pad.