How often do you review your critical numbers, those all-important figures that indicate how your business is doing? Do you wait until the end of the month, quarterly, or year to find out where you’ve been and how you’ve been doing? Or do you keep a constant eye on them?
And what numbers are you measuring and tracking? Because what’s truly ‘critical’ varies for every business, and sometimes it isn’t what you think.
Take profit and loss statements. They’re universally recognized as a key measurement tool, but they’re not without limitations. Because they’re historical snapshots in time, they don’t tell the whole story or reflect the here and now. They don’t tell you where you are going, until sometimes it’s too late.
As you know, I’m all about planning ahead. But you can’t do that effectively without knowing where you are and understanding your day-to-day progress.
So don’t wait for your financial statements to become available to assess the state of your business. Use other numbers closer at hand to keep a pulse on how it’s going. Like…
Cash on Hand – Cash is King. Do you know your cash, the cash you expect to collect in the short term, and the bills that you must pay?
Bookings – The orders you receive, and in some cases, the number of quotes you issue, reflect your success rate. If your bookings, quotes, or proposals are down, you can anticipate that you will have less business coming in and therefore less receivables and cash.
Order Backlog – Do you keep track of what’s in your pipeline? Is your backlog made up of backorders or late shipments or fulfillment? While backlog becomes cash, remember that this is also a measure of service level. I often tell the story of a busy restaurant that only has four waiters, but really needs five. Pretty soon, they will only need three.
Inventory – If you have stock, how well do you know your actual inventory? Wrong inventory estimates will throw off your profitability expectations. Inventory lower than your expectation means your cost of goods sold is higher than you expect or your selling prices too low, which results in a reduced gross profit percentage.
Open Purchase Order – Some people call this ‘open to buy.’ Are your open purchase orders in line with the business you are getting or expect to get?
Service Level – How do know or measure you are doing a good job? Keeping tabs on service levels is essential to continued success (see ‘Order Backlog’ above!).
Payroll vs. Revenue – Is your workforce becoming more less productive? Or is your business down? This is a quick and dirty test and that will ultimately show up your cash. Tracking payroll and revenue side by side tells you at a glance which way you’re headed. If your revenue is up and payroll is down, life is good. If the opposite is true, you must find a way to change that!
In addition, some critical numbers may be meaningful only to you.
For example, one of my peer group members is a builder. He keeps a close eye on, of all things, his site managers’ monthly receipts from Home Depot and Lowe’s.
Why? Because if his crews keep running to local stores for supplies, they’re not properly planning ahead. It reflects their efficiency, which in turn impacts everything from customer satisfaction to profitability.
The same applies to forecasting future market conditions. One RV dealer I know keeps an eye on the fur industry. If fall and winter fur sales are high, he predicts a booming spring RV market. To him, it signals that consumers are confidently buying luxury items.
So ask yourself, what measurements are particularly meaningful to your business, both internally and externally? Make appointments with yourself to check these numbers on a regular basis. Don’t wait for P&L statements. The most critical numbers are right at your fingertips.
When it comes to numbers, are you on your game? Ask for my 10-question Financial Tracking Worksheet. Email firstname.lastname@example.org for a copy.