One of the hardest things for small-business owners to do is to extricate themselves from the daily grind and plan for the future. There always seems to be something that requires immediate attention. Unfortunately, it is not until the month-end or quarterly statements are generated that an owner really knows how well the business is doing.
Obviously, it is too late to change what has already happened. but it also means that the results for the next few months are, to a large extent, already predetermined. The key is to identify a few simple flags, or metrics, that can tell you how the business is doing so that changes can be made sooner rather than later.
The right metric depends on what stage the company is in - startup, growing, stable or declining.
• Startups need to monitor cash-flow, process or production ramp-up and order backlog. Each metric captures its ability to generate and satisfy orders.
• Growing companies consume huge amounts of cash and must ensure added overheads don't outpace new revenues. Customer demand and operations performance seldom move in tandem, so some measure of customer satisfaction is necessary. Service is a common casualty of rapidly growing firms.
• Stable firms need to watch order backlog, preferably as a moving average over three or six months. These firms normally have stable processes, so operating profit margin and variances are the best way to spot if something is amiss. Declining margins could be an indication of price erosion or increased input costs.
• Declining companies should try to squeeze out as much profit as possible. As revenue declines, the key metrics are cost control via reductions in head-count, support, service and distribution expenses.
Ideally, these metrics should be captured and reported every day on a one-page report. They are not meant to solve a problem but to indicate corrective action is required.
Like fish, problems seldom improve with age.
Ralph Hershberger is president of SCORE Southern Arizona, a nonprofit group that offers free small-business counseling and mentoring by appointment at several locations. For more information, go to www.southernarizona.score.org, send email to email@example.com or call 505-3636.