Do you work hard every day? Long hours? Not enough time? Wondering if you are making money or getting ahead. Get to the end of the month and hopefully the profit and loss statement shows you made some money? This is what I call being a passenger in business. Other people and influences are driving where you are going and you are simply along for the ride, albeit working very hard, and hopefully you end up somewhere near where you intended to go when you set off.
Reality is you will end up far from where you wanted to go; whether that be finacially or lifestyle. But it doesn’t have to be this way; you can drive your business and ensure you determine your destination and how you will get there.
You see most business owners use financial statements and lag KPIs to manage the performance of thier business. These however, are reporting on the period that has already finished. By the time you work out there was a problem or, potentially worse, an opportunity it is too late to do anything about it for that period. At best you can try to address how it affects future periods. What proactive business owners focus on are drivers or lead indicators. These are the metrics or measures that can be utilised during a period to ensure that the performance is on track and you drive your result.
So what are the drivers that you should be focusing on? Well there are really only seven. From a profit perspective we have revenue or sale volume and also price, cost of goods sold and overheads and from a cash flow perspective, debtor days, stock or WIP days and creditor days. It doesn’t take much tweaking in each of these areas to see significant impact on profit, cash and value of your business.
If these concepts are quite new for your business, it is probably better to start with averages for your whole business however as you become more effective at measuring and reporting these you can apply to divisions, stock lines, customers etc. to ensure your focus is more pointed and you drive the right areas for the result you are after. Once you, as the owner and decision maker, have your head around these measures it is great to build these into your team’s performance framework (assuming you have one…that is for another day) so that everyone in the business is driving to the same place and in the same direction.
I will address these drivers in more detail in upcoming posts however if you don’t know your drivers find out or seek the right advice to find out. The sooner you focus on your driving the sooner you will get to where you intended to be.