There are plenty of ways to measure the financial success of your business: profit margins and revenue growth, for instance. But do the old standby measures give you the whole picture? It’s never too early or too late to try out new ways of analyzing the financial health of your business.
I recently came across a 2017 Inc. magazine article written by entrepreneur and author Norm Brodsky. In “Pencil Power” he suggests an assessment method that would have been called “old fashioned” in the past, but today might be termed “retro.” It involves—brace yourself—a pencil and paper. (Yep, I’m coming back to the same pencil and paper I mentioned in a blog post a few months ago.) Brodsky believes that tracking monthly sales and gross margins by hand is especially beneficial to new, or relatively new, business owners.
He says the practice will improve young businesses’ chances of success 100 times over:
“By writing the numbers down and doing the calculations yourself, you begin to have a feel for the relationships between them. Later on, when other people are reporting numbers to you, you’ll be better able to recognize when something’s wrong.”
Brodsky recommends a simple exercise to try at the end of each month: write down sales, cost of goods, gross profit, and gross margin of each product for both the month and year-to-date. Then write down the same information for each customer. This is a quick way to see where you are saving money and where you aren’t.
If your business is already doing a good job tracking these metrics, there might be others that could shine light on an area that’s erratic or negatively trending. Try writing down monthly inventory holding costs or Accounts Payable and Accounts Receivable totals. Maybe some cash flow metrics need attention.
It’s a painless, 30-minute exercise that just might surprise you by exposing a weak or strong area of your business that’s been hiding in the dark. Add it to your evaluation and decision-making arsenal. I suspect you’ll find it insightful.
Let us know if we can help you track your metrics.