In the era of smart phones, smart cars and smart homes, you might feel advice about tracking your business results with an old-school number 2 pencil is a little out of step. You shouldn’t.
There is an old saying: “From lips to pencil tips,” which suggests that by physically writing your key figures you become more familiar with them. Like a golfer who leaves the course saying, “I need to do better than a double bogey on number 7,” entrepreneurs who track their key figures by hand are extremely aware of what they need to improve.
Writing the key figures down month after month, you commit them to memory and become more focused on their importance to your success. It’s a practice that is highly recommended for new business owners, and I know several veteran business owners who swear by it.
What you should track
Take a piece of paper and write your key performance figures (check out our Metrics for Success guide for more info on these numbers as well). For most business owners, the common ones are:
- Sales by month
- Gross profit by month
- Net profit by month
- Cash flow by month
- Accounts receivable
- Accounts payable
Sales by month measures top-line revenue growth. In business, either your company is growing or it has begun dying. Watch this number closely. Consider what is going on within your industry, both nationally and in the local market. Set a sales goal each month that represents true, attainable growth. If you fall short, take time to understand why and take corrective action as necessary.
Gross profit by month measures a company’s markup on its cost of goods (or services) sold. This figure gives an indication of how well ownership has controlled its costs and, possibly, whether goods and services are priced in line with what the market will bear. In times of inflation, it’s easy for cost increases to outpace increases in your selling prices. Committing this number to paper will help keep you abreast of the situation.
Net profit by month builds on the gross profit by month analysis. While gross profit focuses on cost of goods or services sold, net profit also encompasses administrative expenses, interest and taxes. If gross profit is optimal but net income is lagging, take a hard look at trimming administrative costs. Perhaps there is a way to manage interest costs. Consider hiring a tax expert who is knowledgeable of your industry.
Cash flow by month measures the company’s liquidity. It’s how much cash is getting added to or subtracted from the bank in your bank account. By recording this figure each month, you will naturally begin thinking about short-term, upcoming events that will impact your liquidity. Many service industry clients prepare for weak cash flow in the month of December, when people have holiday-related expenditures in mind. Conversely a retail business expects its best cash flow to occur in December. Seasonal aspects to a business is a fact of life that should be considered in the business plan.
Tracking Accounts Receivable helps to see how much you expect to collect in the next 30 to 60 days. Seeing this account grow can be either the result of sales growing or another issue like a customer slowing down their payments. Understanding the reason for the growth will help you better understand your future cash flow.
Accounts Payable is the amount you owe vendors that must be paid within the next 30 to 60 days. This balance can tell you how much cash will flow out of your business and thus plan the disbursements based on your inflows from Accounts Receivable.
Focus on important customers
In addition to tracking the numbers, it’s wise to use a second sheet of paper to track results on a customer-by-customer basis. This makes it very clear which customers are most important to your success. And, if an important customer starts slipping away, you will quickly become aware and might be able to salvage the relationship. Your second sheet will track:
- Sales by month by customer; and
- Gross profit by month by customer
If sales to a significant customer slip unexpectedly, learn what you can from the employee servicing the account. Then, follow up personally with the customer. It could be that the customer has fallen on difficult times. Maybe there is a competitor trying to make inroads. Whatever the cause, do what you can to nip it in the bud.
When gross profit by customer increases or decreases from one month to the next, you want to know why. This is a very real measurement of where you are making money and where you are losing it. You need to understand what has happened to that one customer relationship. If gross profit for that customer is up, can you move other customer relationships in the same direction? If it’s down, can you prevent the cause from impacting other customers?
If you would like to get more detailed information on these metrics, download our Metrics for Success guide. If you have questions about how to get started or what your numbers are telling you, give us a call at (404) 353-2148 or email [email protected].