What are the numbers that matter in your business? When you look at most great business entrepreneurs and titans of commerce, you often find that they have a set of numbers or a rule of thumb that they use. Unfortunately, in this era of information overload, we can often be overwhelmed with too many numbers, facts, and insights, and you may be following the wrong metrics. You know, in your heart, what matters in your business. Your greatest challenge is getting the rest of your team on board with those numbers.
In our era of technology we have dashboards that provide insight on a single page with detailed drill down. I must admit I am a fan of an effectively constructed dashboard, but like anything you run the risk of making them look like a screenshot from a NASA operations centre. Ultimately, how do you go about distilling those numbers into something more useful?
The three guiding principles when I’m looking at numbers for any person’s businesses are:
1. Are they easy to obtain? Do they occur naturally? By that I mean, is it data that is current, if you’re a retailer, you’ve got a sales system. If you’re doing services, your practice management system, or if you’re job costing, are these numbers readily available? Do they appear organically?
2. What’s your goal or your meaning that you attribute to these? Do you have goals, targets, budget set for these numbers?
3. Do they indicate performance and return on investment or both?
For example, if you look at the gross profit (G.P.) of a retail business, various industries operate within a certain range. If the G.P. is within or greater than the range, the business is more than likely to be successful. However, if they’re not paying attention to the other costs such as staffing, logistics and rent in concert with that, then you can run into trouble.
The critical point is that the numbers that matter in your business should be more holistic. They might paint a different picture. One of the philosophies that I’ve long been a fan of is the balanced scorecard approach by Kaplan and Norton. Where you cover customer, financial, internal processes (operations) and learning & growth on a single dashboard. The aim of this approach is to link strategy and vision with customer, financial, operations and learning metrics to provide feedback on success and make changes to stay on track.
Note this is not the only approach, since there are quite a few frameworks to choose from, but you get the idea. Thirdly, they need to be something that once you know they’re in the red, they generate a call to action or what are you going to do about it? More importantly, what does your team do about those when they drop below budget? How do they keep you above the line or keep you in the green or the blue zone?
Knowing the numbers that matter in you business will make you and your team more agile over time. Now you might be thinking, that’s all well and good, it sounds like a great theoretical concept, but how do I work them out? It’s really not that hard. The first thing you need to do is look at your current set of numbers from your business management and financial reports. Make a list of what you use to base your decisions on. You should at least have profit, cashflow and return on your investment (capital). Return on the capital you’ve invested in your business can often be overlooked in favour of profit and cashflow.
For example, if you put a million dollars into the stock market, you would expect a certain return, say 17% giving you an income of $170,000 per annum. Based on a recent addition of Money Magazine a few months ago. People investing wisely in various investment funds could expect returns of anywhere from 10% to 25% per annum. Once again, this changes from business to business and industry, to industry, but using an investment strategy for gauging success, is an excellent long-term measure.
The other key component is to look at is the source of truth. How reliable are these numbers? One of the great paradoxes of businesses that are growing fast is they start building these wonderful, information systems that are based on a lot of metrics and feedback that can not be tested or verified. This can often lead to catastrophic business failures, but more importantly, once again, it’s a case of a non-holistic approach. In deriving these numbers that matter in your business, you want to be looking at those that are easy to obtain, provide some reassurance, are holistic, and can be verified as a source of truth. More importantly, when they’re showing a downturn or a negative trend, they can be actionable. Can you do something with them?
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