There are numerous schools of thought on how an owner should run their business. Some focus on sales technique. Others focus on marketing and social media. Still others highlight product quality and innovation, while some rely on data-driven decision-making. As you may have observed, some business owners don’t seem to subscribe to any school of thought at all… they just get out there and do it.
The reality is any one school of thought is simultaneously necessary yet insufficient for a small business to be successful. You might be drawn to one school, but you can’t really ignore the others. What I think is most important is that you pay attention to the business metrics that matter to your specific situation.
Of all the metrics you could track for your business, the following categories strike me as most relevant: a) financial; b) labor; c) material management; d) operations; e) quality/efficiency.
Under each of these categories you can identify specific metrics, such as:
- Financial: gross and net revenues; margins; profit/loss; etc.
- Labor: person-hours per unit; labor cost per unit; cost of employee turnover; etc.
- Material Management: raw material costs; supply chain issues; cost-of-goods-sold; etc
- Operations: productivity: safety; customer service and retention; etc.
- Quality/Efficiency: raw material loss/waste/shrinkage; defects/defectives; process capability; etc.
No matter if you’re a solepreneur, an independent insurance agent, or smartphone app developer, you are operating an entity called “your business.” It has vital signs that must be monitored and maintained, just as you would maintain your own personal health. Let’s consider two examples.
I know a small businessman who operates a used car dealership. He chooses to focus only on basic financial metrics… money in, money out. On the one hand, that might be the quickest and easiest way to know how the dealership is doing in any given month. On the other hand, it offers little insight into customer buying trends, inventory sources, and operational efficiencies… things that could lead to increased sales and customer satisfaction. He is cash wise, does not have a deep debt load, and is protected against a few slow months in a row; however, he is not in a position to make choices that could propel his business to the next level of growth.
In contrast, I know someone in a related industry, selling sport vehicles such as snowmobiles and ATVs. He is focused on sales and operations, and has a very good record of moving inventory through his business and satisfying customers. However, he does not always look at the bigger financial picture for his business, and risks insolvency due to a failure to balance expenses and revenues.
For many small business owners, the demands of the business require that the owner simply focus on the day-to-day operation, getting product out the door, taking care of customers as they come. Fair enough, but as long as you stay in that position, you limit your business’s capacity to grow.
Here are some guiding principles for identifying metrics that matter in your business.
- Limit which metrics you track
There are dozens of things you can measure about your business. Just because you can measure, doesn’t mean you should. For a small business owner, five or six metrics at most is probably the right number.
- Select metrics holistically
As the above stories illustrate, a balance of metrics from diverse aspects of your business gives you a more complete picture.
- Identify trends over time
Some of your metrics may show seasonality. Others may not depend on the calendar, but may fluctuate according to other influences. It is in your best interest to try to understand and prepare for such fluctuations. You don’t have to prevent them, but you should be ready to respond to them.
- Share data on these metrics with employees and/or advisors
If you have an advisory board for your business, share with them why you chose these metrics, and what the most recent data looks like. If you have employees, teach or train them about what these metrics show and why they are important. Make clear to them how their work day-to-day is linked to the metrics that you care about. They will care, too.
To reiterate, business metrics are the vital signs that indicate the overall health of your business. Learn to read these vital signs, respond to them, and keep your business healthy and growing.