Tip # 8 - Run Your Business by the Numbers
In this tough and turbulent economic time, it is imperative that everyone from business owner to operations manager know exactly where their business is financially at all times. As simple and mundane as it sounds, it is crucial in order to weather the rough storms ahead. I believe this month’s tip may be more important now than ever!
Run your business by the numbers. Prepare monthly financial statements no later than 5 days after the month end and use them as proactive tools to enhance your business performance. As Darwin said, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” You cannot be responsive to change unless you know what changed! This practice is more common in large companies; they look at their key numbers daily. It is easier for small businesses to react to change faster than larger ones. You must use this advantage! Companies report significant savings when this practice is consistently implemented. The savings are a result of taking greater control over profits and losses.
Once you know your breakeven, monitor continually the following numbers:
1. Compare actual Cash-flow to your Cash-Flow forecast
2. Compare the Total Cash-Flow to the prior period
3. Compare Accounts Receivable as Percentage of Sales to prior period
4. Compare Inventory as Percentage of Sales to prior period
5. Compare Accounts Payable to the prior period
6. Compare the Current Ratio to prior period
7. Compare Revenues to forecast and prior period
8. Compare Sales per Salesperson to prior period
9. Compare Sales per Employee to prior period
10. Compare Gross Margin as Percentage of Sales to prior period
11. Compare Expenses as Percentage of Sales to prior period
12. Compare Return on Total Assets to prior period
13. Compare Inventory Yield to prior period
As you make comparisons, you can then implement changes to volume, gross profit, expenses and other areas of the business that are not operating to expectation.
If the statements cannot be produced within a reasonable period, your problem may be within your systems and controls. Create timelines and deadlines for the key steps need to be completed and require accountability with those deadlines.
Not knowing your key business measures distorts your decisions. It’s like beginning a dangerous journey in the dark without a light. What good is a compass if you can’t see it? Working in the dark means not knowing how well your business is doing and where you stand compared to other retailers. Working in the dark means you are running a business by the seat of your pants. So, turn on the light. Prepare monthly financials and then use them.
Thanks for reading.