Have you ever wondered why your business isn’t making as much money as you think it should be? Maybe you haven't been asking the right questions.
Before getting into the detailed metrics you should be tracking, let's start with this question, instead: “What does success look like?”
If you have a long-term strategic plan, then you should be able to answer this easily, and figuring out what metrics to track will be simple.
If you haven’t prepared your strategic plan yet, you can decide what metrics to track by answering the following questions.
- What is my annual profitability goal?
- What amount of profit is needed each month to reach that goal? Does it need to increase each month? Is my business cyclical?
- How fast do I want my revenues to grow?
- What is my gross margin, and what should it be in my industry?
- What is the sales level I need to reach to get to my profitability goal, by month?
- How many customers do I need to support that sales level?
- What percentage of my prospects or new customers actually buys anything?
- What are the steps required to get and keep those customers?
- Do I need to bring on new products to reach that level of sales? If so, how often and how many?
- How much is my monthly overhead?
Let’s imagine that you have done this exercise and have a detailed definition of success. By going through this process you’ve also generated some goals. Now you can identify the specific things that you need to do to achieve those goals, and start to improve your progress towards them by setting up a dashboard and tracking some important metrics.
I recommend that you start with 10 to 12 metrics. Some will be tracked daily, some weekly and some monthly.
Here’s a sample dashboard—or collection of metrics—for a small retail store.
- Traffic: The number of customers who came into the store compared to your goal, as well as compared to previous days
- Conversion: The percentage of customers who bought something compared to your goal and to previous results
- Average sale: The amount the average customer purchased—again, compared to your goal and previous results
All of the above (cumulative for the week), plus:
- Best- and worst-selling product lines
- Total sales
- Cost of goods sold (dollars and percentage)
- Gross profit (before overhead, dollars and percentage)
Again, these numbers should be shown compared to your goal, the previous week’s numbers, and, once you’ve been at this awhile, the same week of the previous year. That way you can easily see what the trends are, and take action if required. For example, are sales up from last year, but the gross profit percentage is down? You’ll want to figure out why, and try to correct that trend right away.
All of the above for the month, compared to the previous month and the same month last year. (In retail, we often use four-week months instead of calendar months to make this easy. You can use this trick for other businesses, as well). In addition, you should review and understand:
- Profitability by product line
- Product line velocity: What products or lines are increasing in popularity? Which are decreasing? This report will help you make wiser purchasing decisions. It’s a great report in any kind of business, not just retail.
- A complete profit and loss statement, balance sheet, and cash flow statement. These will be much more useful if they are comparative, either to the previous month, same month of the previous year, or both. That’s how you can spot negative trends and fix them.
- A budget vs. actual report, which will show you if overhead spending is in line with your budget. If you’re over budget, you should take action right away to find out why, and make adjustments. (See my article, “Turn Your Annual Operating Plan into a Budget” if you need some background on budgeting techniques).
Once you get your dashboard up and running and the systems in place to track the numbers, generating the dashboards and monthly reports is very easy. You’ll be amazed at what you’ll learn about your business. Best of all, you’ll start making better decisions–and better decisions lead to better profits.
JoAnne Berg, CPA is the founder/CEO of Peer Coaching Network, Inc. in Carlsbad, California. She is a trusted business advisor with over 30 years of experience as an entrepreneur, CFO/COO, and CPA/advisor to closely held businesses. Read her blogs at The Art of Small Business. You can follow her on Twitter @JoAnneBerg and on Facebook.