Numbers Are Important. Which Ones Do You Use to Manage Your Small Business?
I hear it all the time from entrepreneurs. "I'm not really a numbers person." Especially, the long-time ones. They go on to tell me about how they use "their gut" to drive most critical decisions. Yet, when I ask more penetrating questions, I come to find that there are always a couple of key numbers that they track religiously.
They do this because they've learned that if these critical numbers or "key metrics," are where they are supposed to be, that the business is sailing right along. If not, they know what they need to fix to get it back on the right track. And the interesting part about this (and which should come as no surprise) is that the type of numbers that are, typically, tracked does vary by type of business. For example, tracking cost of goods sold (COGS) is almost meaningless in a software business, but is one of the most critical metrics in manufacturing. Shipping costs are simply part of doing business (and usually passed along to customers) in most product businesses. Yet, in a distribution business, they are, often, the difference between a profitable and an unprofitable business.
For me, no matter the type of business, I always tracked three numbers on a weekly or monthly (depending on how close to the edge the business was running) basis. Those were net forecasted cash flow (the difference between forecasted cash in and cash out); forecasted to close in the next 30 days (my most critical sales situations) and backlog (what we were contracted to ship/bill over the next 30-60 days). Now I looked at lots of numbers (I am a numbers person) during a week or a month, but only was focused on these three.
No matter your type of small business, you need to be a "numbers person." But there is also an extreme. Many entrepreneurs and small business owners needlessly complicate the process with a "dashboard" of fifteen or twenty critical metrics that they track to manage their business. That's like trying to manage and achieve fifteen or twenty objectives. Plus, you have to wonder how many of those are redundant (a part of a higher level, more critical metric) or not really critical? Keep it simple!
Determine the key elements that drive your business. Determine and track the numbers that support those. Maximum of three to five, on a weekly or monthly basis. That's all you need!
"The Entrepreneur's Yoda knows these things. He's been there. May success be with you!