What numbers monitor the vital signs of your business? You may be surprised to find you must look beyond the numbers on your financial statements.
Most successful business owners have a set of key numbers they use to monitor how well their business is doing. Usually these numbers are a combination of financial and nonfinancial measurements.
You can improve the profitability of your business by monitoring and analyzing the numbers that are vital to your business. Since each business is unique, the first task is to determine what measurements will reveal the most about your operations.
Look beyond the financials
Many business owners rely heavily on their financial statements in making business decisions. Indeed, financial numbers are only the beginning; they can be one of the more useful tools used in the decision-making process.
But remember, the importance of financial statements lies not just in the measurement of current income and expenses, but in providing you information that may warrant further review. Other very useful indicators are found in payroll reports, production reports, telephone logs, customer complaint reports, or production quality control reports.
What numbers are important?
What key numbers best monitor the vital signs of your business, and how often should you compile these numbers?
Key numbers often vary by business. Some are obvious; sales trends, cost of product, inventory turns, accounts receivable and accounts payable. But some are not so obvious. To determine yours, a vital sign must have a direct and immediate impact on your business. Otherwise, the information, though useful, won't provide the timely indicator required.
Numbers at a point in time are meaningless. They must be taken in context and compared with something else. This comparison could be against a plan or against prior month or prior year. So in deciding how often to get the information, remember you're focusing on trends. Distortions caused by too short a measurement period are just as bad as undetected trends caused by too long a period.
Your goal should be to get information soon enough to act on it instead of having to react to a situation that has escaped detection for a critical period. With common sense and experimentation, you should be able to identify the significant numbers for your business and the right measurement periods.
Consider size and complexity
The size of your business and the complexity of your product line or services will help determine what indicators you need.
If you are running a drive-in hamburger stand, perhaps one of the best indicators of how your business is doing is the number of hamburger buns used per day. The number of hamburgers sold is probably a reliable indication of other aspects of the business. The number may relate to the total dollar volume of drinks sold, the total poundage of hamburger taken from inventory, or the total number of employees needed for the day.
If refunds to customers have always been a strong indication of good customer service, a reduction in refunds may be an indicator that the field representatives or customer service people are not being sensitive to customers' concerns.
On the manufacturing line, the amount of rejected products may be your measurement of quality control. A change in the quantity of rejected items at the end of a given shift should certainly send a signal that something needs to be checked.
Every business owner is concerned with the annual sales volume it takes to at least break even and, therefore, has reduced his breakeven to a daily sales figure. Although interesting, a drop below the breakeven point for a day or two doesn't spell disaster.
A more interesting figure might be a monthly, quarterly, or annual computation of sales per employee. Suppose that over the last three or four years you have averaged $150,000 of gross sales per employee. If your gross sales have now dropped to $125,000 per employee, perhaps you are overstaffed, perhaps not. At the very least, you have an indicator that deserves investigation.
Timely analysis is critical
You prepare monthly financial statements to avoid having to wait a whole year to find out whether or not there is a profit or loss from operations. Likewise, don't wait for your monthly financial statements to get an indication of problem areas which can be revealed to you by these other indicators.
Don't be hamstrung by your computers in your efforts to obtain these vital numbers. There's a lot to be said for a manual report pulled from various time records, production reports, daily sales, etc.
The survival of most businesses depends on their growth and adaptation to changing operating conditions. Consequently, you should keep a critical eye on your business indicators. As your business develops, some indicators may lose their usefulness and need to be replaced with others. Similarly, expanding into a new product line may require fashioning a set of indicators specific to that product's needs.
Get expert help
Often asking for help in reviewing your financials is the best place to start. This review can help you focus on the correct information and provide suggestions for improving your reporting to identify the important drivers of your business.