Lord Kelvin, the British physicist and founder of the absolute value temperature scale, taught that the inability to express knowledge in numbers renders that knowledge meager and unsatisfactory. Is the knowledge you have about your business meager and unsatisfactory?
The one-employee show
If you start a business by yourself and you have just one customer that buys just one product or service from you, it’s pretty easy to track your business performance. You do not need to consult a management team, reports, or mounds of data to understand where you are and where you are going. You know every day-to-day detail of your business, and you rely on your first-hand knowledge to influence the decisions you make.
Adding new employees, customers and products and services to your business makes understanding performance trickier. The more complex a business, the more difficult it is for one person to be intimately involved with all of the day-to-day details on a first-hand basis. A CEO or business owner has to start to rely on what their employees, customers and vendors tell them about the performance and health of the operations.
As this complexity increases, the primary decision-maker in the business begins to rely more and more on his or her “gut,” which is intuition developed through experience, to interpret information from various sources related to the company. Without concrete, first-hand information, many entrepreneurs and founders feel like they are left to make decisions blindly, not sure if they are taking the company in the best and most beneficial direction.
There is a way to overcome this doubt and turn uninformed, anecdotal, gut-based decision-making into well-founded, confident decisions. It is a process of using numbers to understand and improve performance. But I’m not talking about just any kind of numbers, because often data and numbers can leave a business owner more confused than actually foster clear, strategic, actionable knowledge.
Best decisions possible
Gut instincts are the base of the decision-making process. When you introduce raw data to these instincts, it has little impact. But when you turn that data into information through some basic organization and analysis, it starts to make a difference. And, when you synthesize that information into the context of where you’ve been, where you are, and where you are going, it empowers you to make the best decisions possible for your business. Good decisions lead to improved profitability and cash flow, making the proper use of numbers extremely important to business owners.
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Bad information and bad consumers of information
Not all data and analysis have a positive effect on decision-making, for two reasons. First, the data may not be worthwhile. It may be out-of-date, inaccurate, or not focused on the pivotal performance drivers of the business. Second, the person consuming the information may not know how to process it and what to do with it. In almost every company I have known, it is a combination of both.
These two problems can be solved, but not without some effort. Here are a few of the common barriers entrepreneurs face when trying to use numbers to run their business.
- Not knowing what to track in the first place
- Untrained or unskilled staff
- Poor processes and procedures
- Unleveraged technology and software
- Out-dated information
- Not knowing what to do with the data once they have it
The end goal is to have the right information in the right hands at the right time in the right format in the right context. Study after study shows that when companies solve the barriers to properly using numbers to run their business, performance improves. In fact, two independent studies specifically identified that about 90 percent of businesses that implement the use of numbers correctly saw a moderate to very high improvement in performance. The authors of The Balanced Scorecard specifically identify the need for measurement systems to survive and prosper in information age competition.
I don’t know who first coined the phrase “that which is measured improves,” but they must have owned a business at some point in their life. Just the act of measuring brings value, but a system that allows you to understand your past, present and future performance quickly becomes a fix for so many problems facing businesses today. And the right measurement systems have a way of uncovering overlooked opportunities, inefficient use of working capital, and so much more.
Is it worth all the effort?
Have you ever felt that measuring and tracking things is an unnecessary expense, an impediment to getting more customers and growing a business? Maybe it just seemed too time-consuming to be worth all the hassle. I would encourage you to consider changing your opinion on this issue as quickly as possible. If done right, knowing the numbers of your business will bring strategic insights you never considered and competitive advantages you never imagined.
Ken Kaufman, Founder & CEO of CFOwise®, serves as the Chief Financial Officer for a dozen start-up, emerging, and medium-sized businesses. With almost two decades of experience and as an adjunct professor and author of Impact Your Business, Ken focuses his professional efforts on helping entrepreneurs obtain clarity and improve cash flow with the six scoreboards every business needs.