Knowing what to measure is the first step to creating a great business.
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Here are 5 things to make your business better.
In a small business the most important number is often the one that tells you how much cash you have on hand. You will find that this number doesn’t exist in a profit and loss statement. It is on the balance sheet, but by the time you see it, the number is out of date.
The second group numbers you may want to know is how long your cash will last, what is the expected amount of cash you’ll receive in the next week and how much cash will you have to pay out over the next week. As with your cash number, you can figure it out from your financial statements, but by the time you do it’s out of date.
The numbers you need are likely not in the P&L.
Managing your business is difficult. You may have been taught that the important numbers in your business are contained in your traditional financial reports. My experience is that most of the time the really important ones aren’t even close to your P&L.
We’ve written about dashboards in the past both here and in Josh Patrick’s NY Times blog. Having a dashboard that outlines your truly important numbers allows you to track what drives your business and what you need to be paying attention to daily and or weekly.
The important thing to know about developing your dashboard is that it’s a trial and error process. The first numbers you choose to track might not be the ones that make your company better. Be ready to experiment with a different set of numbers. Be ready to change the numbers you track as circumstances change in your business.
You don’t want to track too many numbers.
Too often we see people keeping track of rows and rows of numbers. The problem with this is that if you track too many numbers you’re going to have a hard time figuring out which ones are important. We have a limited range for focus. Concentrating on three numbers is usually much better than tracking ten. It’s figuring out what the important three numbers that’s difficult.
Tracking too many numbers takes too much time and effort. I often ask people what should be obvious numbers about their business and they don’t know. It’s really hard to know the important numbers when you’re trying to keep track of every number.
The numbers you track should come to you weekly or even daily.
If you get key numbers in your business once a month you might find that when you finally see them it’s too late. Getting numbers on a timely basis allows you to have an early warning system if something is wrong.
Timely reporting helps you avoid problems. You get an early warning system. At first, your accounting department might give you some push back. After a few weeks they’ll likely find that getting your weekly or monthly numbers isn’t a big deal. Especially if there are only three numbers they’re tracking.
Your numbers will be different than your best friends.
I find that many business owners ask their friends what numbers to measure. Your friends likely have a business that’s different than yours. Even if they are in the same industry, they will have different areas of focus and likely have different numbers they track.
You need to sit down and ask yourself what are the crucial numbers for you and your business. You might have to think outside the box a bit on this. You likely won’t find those numbers sitting in your profit and loss statement or your balance sheet.
It’s going to take some time before getting weekly numbers is useful.
The best thing about tracking crucial information is that you get to see trends in your business. It will take you about three months before you start to see information that will help you make good decisions.
You’ll know what you expect to see and if you start seeing numbers trending in either a better than expected or worse than expected manner you can start asking questions. It’s the trends that often help great businesses make timely decisions on what to do next.
I’m curious, what numbers do you measure in your business? Do you think you can come up with a group of numbers that make a difference in your business? If so, when are you going to start measuring them? Send me an email at email@example.com. I’m always curious what others are doing in this area.
We’ve put together a case study on key financial metrics. You might find some ideas on where to look when it comes time to put together your own list of key numbers. To get this case study, click on the button below.
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