What measurements or indicators do you look at to measure your business performance?Small business owners tend to have an intuitive sense for how their business is going. Is the phone ringing? How’s my bank balance? What’s the mood in the office? Everything that they do gives them feedback about how their business is performing. However, there is a problem with relying on intuition. Our intuition is a way that our brain uses to short-cut the prefrontal cortex (thinking part of the brain). It uses our past experiences to “filter” the data we are seeing and fit it into a pattern we’ve seen before. So that gut instinct is usually pretty accurate as long as the data we are looking at is similar to a pattern we’ve seen before. The problem lies when the pattern doesn’t fit, when you are entering into a situation when your past experience isn’t a good fit. That’s when you need to have a better handle on the actual data, and use analysis of that data to guide your decision making.

We find that our clients often fit into this category, as their business grows there is just too much data to take in through osmosis. With a more varied and active customer base it’s too difficult to keep track of every customer, and each transaction. Finding ways to aggregate that data into reports, and analyze those reports using charts and graphs becomes essential to staying on top of how your business is performing.

What reports to we need to see?

1. Monthly Financials

At least monthly review your full financial statements. Income Statement (Sometimes called your P&L), Balance Sheet and Cash Flow.  Your Income Statement should tell you if you are making money, if you compare your actual performance to your budgeted performance you can see how each of your spending and income categories are doing compared to your prediction at the beginning of the year. Is your income up, but your expenses are also up? That’s probably OK as long as the growth in income is greater than the growth in expenses. But if your income is below expectations, then your expenses better be too!

Your balance sheet tells you if you are a debtor or a borrower. How are your receivables? They are going to grow if your sales are growing, but how much is too much. By calculating your Receivable Days Outstanding you can get an index number that will tell you about how well you are doing at collecting your receivables regardless of your sales growth. When your A/R Days go up you are not collecting as efficiently as you should, when it goes down you are collecting more quickly.

Also check your cash on hand, or borrowing capacity; do you have access to the cash you will need to grow? A Days Cash on Hand calculation can help you to get a handle on it. Total up your cash needs for the next 90 days and make sure you have cash on hand to cover it (If you are growing you need more cash than you did in the past!)

Last, make sure you aren’t taking out too much money! You need to maintain a healthy positive net worth (called Total Equity on your balance sheet). You can do that if you make sure to leave some of your profits in the business to operate it.  Your Cash Flow statement gives you an overview of what cash is coming in and going out. This is really the amount of money you have to operate your business. You can have positive earnings, but a negative cash flow if you aren’t getting paid for the work you are doing, or if you are taking out too much in shareholder distributions.

While financial indicators are important, it’s easy to get lost in all the numbers. I recommend using Trailing Twelve Month charts (TTM) to graphically display the trend in your sales, and profits (at a minimum).

2. Sales Indicators

Financial Indicators give you a good idea of what happened in the past, but you need to look at some leading indicators as well. Your Sales Manager or CRM system can provide a nice look at what those would be. How many leads have you received (compared to last month, or last year)? What are the value of those leads and how are they moving through your pipeline? The number  and value of proposals issued (compared to last month or last year) is also important. Lastly, closed new business (from existing clients and from new clients) is a more immediate indicator.

Each of these directions have issues (how accurate is your forecast, is there a lot of “junk” in the pipeline, etc.) but every business needs to choose a path, and start tracking at least some of those numbers; dealing with the issues as they come up.

3. Internal Efficiency Measures

Now that we have looked at what’s coming in, we need to look at how well we are doing at delivering that. For a service firm Utilization (billable hours/total hours) is a key efficiency measure. However, so is on time delivery. In a software or product company, tracking the cost of quality is key (time spent fixing problems or dealing with customer complaints and issues divided by sales). For other firms they can track project profitability, or contribution margin by project. These measures are usually more unique to your business. What can you look at that gives you an indicator of how much time or effort you are putting in to delivering on any particular piece of business.

4. Community Measures

Your business is not just a profit machine, it also has employees, and community members who care about your success as well. How do you measure your effect on those resources? Do you survey employee sentiment? Do you engage in community improvement projects? How do you know that these things are having a positive effect? Employee turnover is one sign (but it’s a lagging indicator, one you see it you already have a problem). What else can you measure?

Lastly, you need to talk about the frequency of these measures. I worked for a very seasonal business that tracked leads and orders by day and the whole company knew what the number for that day should be. Other measures like employee satisfaction are difficult to measure frequently and you might only check them annually.  The key is that you spend time each week/month and quarter looking at the numbers that your business creates, deciding what they mean, and taking action based on the results. Your business will be healthier and you will worry less.

What measurements or indicators do you look at to measure your business performance?

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Brad Farris is a small business advisor with Anchor Advisors, Ltd. in Chicago, Il. Since 2001 Anchor Advisors has been helping creative professional firms to grow, by helping them clarify their purpose, get the most from their people, keep their eye on key performance measures, and implement consistent processes. Brad is also the author of The Business Owner’s Champion: 6 Practices to Build your Nerve and your Business.