The majority of people I have run into who have started a business over the last ten years have had great instincts about an idea to provide services or sell products. Running a small business is a difficult undertaking, but the companies who are thriving and growing are the ones that understand the truth about their financial performance – they are able to track the financial evidence of where their business has been and where it is going over the next 12 months.
If you get to a point where feeling good about your business is how you judge whether or not your business is doing well, your business may have a leak in the hull – as in going down like the Titanic. Remember, the sole purpose a business exists is to sustain itself and give its investors (you, your employees and investors) a financial return. A business does not exist to make you feel good about it, although this may be an outcome of what happens to you by operating a business, it is not the responsibility of a business. If you think this sounds a bit heartless, it may be, but it’s the truth and facing the truth is a business owner’s responsibility when it comes to financial performance.
For those of you thinking you need to know everything about business finances or have access to financial reports from your accounting, but don’t really understand what they mean or how to tell what is happening in your business; the following are basic steps you can take to ensure that you are managing your business by the numbers.
- Make time to learn about business finances and ask stupid questions. If you don’t already know, there are no stupid questions when it comes to the finances in your business. However painful it may be, you must make time to learn about the basic financial principle of operating your company – knowing that you bring in more than you spend is not a financial principle. And if you already know the basics, push yourself to learn more.
- Define key metrics to track. These may include things like revenue per employee, days accounts receivable, and other such operating metrics. I recommend tracking at least 5 key metrics. The goal here is to understand the financial health of the various parts of your business. Use the Internet to search for the definitions of key metrics in your industry – whatever it takes.
- Understand the trends and trajectory of your metrics. You should be able to easily understand if you are getting better or worse each month (trends). And if you are on a path to getting better or worse relative to another metrics looking forward (trajectory). This helps you tell if your business is moving in the right direction in key areas of your business.
- Make time for monthly management. Regardless of how you feel, take at least 30 minutes every month to review your financial performance and ask the tough questions. Good questions to start with are a) are we doing the right things? and b) are we doing the right things right? You may not have all the answers to these questions, but if you are willing to push yourself and your team to get the answers you will learn more about your business to make the necessary adjustments to improve.
- Share your findings with key employees. This is a delicate matter, but if your key employees can relate what they do in their jobs to changes (positive or negative) in specific financial metrics, you will have a much better chance of motivating them.
We are all passionate about improving our businesses. However, the principles of managing by the numbers on a regular basis are what separate the experienced business owners from the also-rans. It is always a struggle at first, but when looking at your numbers becomes a routine monthly process, especially using a financial dashboard like Corelytics, it becomes much easier. With a few of the basics in place, the opportunities for fine tuning and growing the business are limitless.