Knowing Enough to Run a Successful Business
If you own and operate a business, you probably want to make it successful. Granted, success comes in many flavors, and there are also “degrees” of success, where maybe you do okay but not as well as you’d like (or not as well as your local competitor). Running a successful business, and crafting a business with sustainability and long-term value, takes information as well as know-how. Remember that information = power and you want to be as powerful as possible when it comes to running your business.
While today’s information technologies, mobile devices, and “everything as a service” have the capability to deliver way too much information for the average business owner to make sense of, there are a few areas of the business where investing in a little insight and reporting can make a big difference in the level of understanding you have about the business.
Rather than making decisions based on guesses or gut, business owners should use actual historic data relating to these are key areas (and key performance indicators) to help predict sales and order volumes, estimate cash flows, and forecast profitability.
The “customer lifecycle” does not start when someone buys from you, it starts when they become a potential customer (often referred to as a target). Even before someone buys, your business may expend resources to expose your brand or product to them on websites, in advertisements, and through other marketing channels. These marketing efforts will (hopefully) result in the generation of qualified leads for the business to sell to. Unless the business understands the costs involved and the efficiency of the marketing and lead generation efforts, it cannot understand the actual cost of getting a new customer.
The next step in getting customers is turning a qualified lead into an actual paying customer. The business will want to keep track of conversion of leads into customers, along with sales data including total sales, number of items sold, and how items were priced. Powered by sales performance data, business owners can learn whether or not their lead qualification efforts are working, if their products are competitive, and if the pricing is in alignment with the industry.
When businesses operate, they essentially produce whatever work product their business model is designed to produce – whether it is a professional service, product, logistical support or whatever. Every business produces some type of work product. This is the operational aspect of the business, and business owners should want to know as much as possible about how well operations are running and how effective the operation is. This isn’t just the cost of production, (the yield expected for a given investment in materials or equipment), it is also about the quality of the product (customer satisfaction) and the quality and value of the service behind it (customer retention).
Money (more specifically, cash and the availability of it) is the metric that most small business owners tend to focus on. It makes sense, too, given that most small businesses survive based on what they have in their bank accounts. Then again, looking at the accounts receivable and payable won’t tell the entire story, either. Business owners need to know how quickly their customers generally pay, and they need to know how much capacity or inventory they have before needing to buy or develop more.
The message underlying this entire discussion is that fact that you can’t analyze what you can’t quantify (no information = no power), so it is essential that systems be in place to capture information from the business and its activities. Further, recognize that it takes some skill and experience – perhaps from your trusted accounting professional – to put the information together so that it makes sense and is useful.
Measure, Manage and Succeed. It’s all about knowing how to speak the language of finance