Are you looking forward or backwards in your Business?

photo by Jerry Kirkhart via Flickr

photo by Jerry Kirkhart via Flickr

I met with a business owner last week and asked him how his business was doing.

He proudly told me, “Based on our financial reports from the 1st quarter, it looks like we’re on track to hit our goals for this year.”

The first quarter? That was (literally) months ago at this point. The problem with tracking your business success just based on financials is that you’re often looking into the rear view mirror while you try to steer forward. Typically your financial accounting data is lagging…usually not by a month or two, but it’s not unusual for it to be weeks out of date. And for a lot of businesses, things can go awfully far south in a fairly short span of a few weeks.

Obviously if things aren’t going well, you probably have a gut feeling…but wouldn’t you rather have some objective data to help you tell how it’s going?

Lagging versus Leading

I’m not suggesting that you use financial data – it’s a must have in order to really understand and manage your business overall.  But unfortunately revenue, profitability, cash flow and other financial reports are all lagging indicators – what you really need is a way to track your performance to tell you how you’re doing right now and ideally how things look for the next few weeks or months (leading indicators).

The question to start with is this:

“What creates your financial performance?”

If you’re a service company Financial Performance is generated by the work done by the employees of the company – for a consulting company you could track billable hours, for a plumber you might track the number of jobs done in a day or a week and multiply that times the average revenue per job.   The bottom line is also impacted by your expenses – labor costs / payroll along with other overhead type items like rent, software, etc.

Example: By the time I get to revenue (actual money in the bank), I’m in trouble. Employee ‘A’ has 35 billable hours this week, which will be invoiced for $3500 (assume $100 / hour to keep it easy) at the end of the upcoming two week period. The client will then hopefully pay that invoice in 30 days. So almost 45 days after the work is done you are (hopefully) depositing a check and will be able to count that revenue…and of course you had to pay that employee back when the work was actually done. That’s 45 days to know what’s going on (and that’s probably best case for this example). It’s a long time…and not a viable way to proactively manage your business.

There’s another option – let’s say you know that your weekly expenses are covered if your team averages at least 28 billable hours a week. With that in mind, you can immediately tell if you’re having a good week or a bad week based on the number of hours everyone has reported for that day or that week.

Hopefully you can also project with some certainty how many hours the team will have next week.  Maybe it looks like next week is going to be a bad week…the good news is that it’s a future bad week, so maybe you can generate some marketing and sales to proactively get some business going.

Example 2: Let’s say you have a product company. Your financial performance is created by the combination of what you sold the product for and how much it cost you to make and store the product until it sold. That can be pretty complicated to track and it could take a while to get to all of that data to make it useful. However there should be a way to short cut that process.

You know from the math and past experience that if you sell at least 100 widgets in a month that it should be a good month (or maybe some combination of different widgets or wholesale vs. resale). Whatever it is you can still tie it back to # of sales. If you wanted to get more predictive, you could look at solid leads in your sales pipeline and convert that to likely units sold.  Either way it’s either current data or slightly future data, not a couple of months old.

And being able to look forward will make a lot of difference!

And on top of that, the real power of finding the right metric…or KPI (Key Performance Indicator) is that your team can also get on board with managing to that metric as well. If the team knows they need XX number of billable hours per week to be successful, then you’re more likely to reach that number if everyone is focused on meeting or beating that target.

What are the key metrics in your world?

When’s the last time you sat down and took some time to figure out how you could track your performance and know how you’re doing TODAY?  What are the top 3 to 5 things that you are tracking, or should be tracking? Generally you don’t want to get too carried away with metrics. Try out a few and if they aren’t compelling enough or you can’t get enough solid information from them (easily) then try something else.

We’d love to hear your thoughts – share them in the comments below.

Shawn Kinkade   Kansas City Business Coach