The numbers on your financial statements aren’t the only numbers that are vital to your business success. In order to monitor the vital signs of your business, you’ll need to look beyond your financial statements.
Most successful business owners have a set of key numbers they use to monitor how well the business is doing. Usually, those numbers are both financial and non-financial measurements.
Since each business is unique, you’ll need to first identify what measurements will reveal the most about your business operations. Once you’ve determined those measurements that are vital, you can improve the profitability of your business by monitoring those numbers.
Look Beyond Your Financials
While financial statements are one of the more useful tools used to make business decisions, they aren’t the only tools you should use.
Financial statements show the current income and expenses, but they also provide information that may warrant further review. Useful indicators can be found in payroll reports, production reports, telephone logs, customer complaint reports or production quality control reports.
What Numbers are Important?
Key numbers to monitor the vital signs of your business often vary by business. Some numbers are obvious like sales trends, cost of product, inventory turns, accounts receivable and accounts payable. Some are not as obvious. To identify which numbers are key to your business, a vital sign must have a direct and immediate impact on your business.
Numbers must be taken in context and compared with something else such as a plan or prior period of time. Remember you’re focusing on trends, so the frequency that you get your information should not be too short causing distortions or too long leading to undetected trends.
The goal should be to get the information soon enough that you can act on it instead of reacting to a situation. With common sense and experimentation, you should be able to determine the key numbers for your business and the best measurement periods.
Consider Size and Complexity
The size of your business and the complexity of your product line or services will help you determine what indicators are needed.
For example, if customer refunds have been a strong indication of good customer service, a reduction in refunds may indicate that customer service representatives are not being sensitive to your customers’ concerns.
Every business owner is very familiar with their company’s breakeven point and are concerned with the annual sales volume it will require to at least reach that point. Although interesting, dropping below the breakeven point for a day or two doesn’t spell disaster for your business.
Timely Analysis is Critical
The survival of most businesses depends on their growth and ability to adapt to changing operating conditions, so you should keep a critical eye on the indicators you’ve identified as key for your business. As your business develops and grows, you may find that some indicators lose their usefulness and need to be replaced by others.
Get Expert Help
The best place to start is often asking an expert to review your financial statements. This can help you focus on the correct information, provide suggestions to improve your reporting and identify the important drivers that are key to your business.
Have questions? Contact us today!