The first quarter of the new year is a time to set goals and implement changes that will transform your business and help you achieve even greater success in the year to come. But while setting lofty goals is nice, executive leaders must also consider how they will keep track of business health.
Tracking the Health of Your Small Business
From evaluating the state of your finances to monitoring outcomes for new business initiatives, becoming better informed about your company’s progress will go a long way in helping you make sound strategic decisions and increasing profitability.
Define KPIs for Individual Projects and Departments
Each department within your company is distinct, and as such, each one should have its own set of KPIs that help you determine their efficiency and overall contribution to the business.
For example, marketing and sales teams may have KPIs for customer lifetime value, landing page conversion rates or lead to customer ratios. Inventory management may have KPIs for inventory turnover, average inventory and holding costs. KPIs will vary from department to department, and quite often, may also vary for different campaigns or projects within the same department.
However, as Jesse Mawhinney of the Kula Partners agency notes in a blog post for HubSpot, “As you begin to identify KPIs for your business you should be aware that less is almost always more. Rather than choosing dozens of metrics to measure and report on you should focus on just a few key metrics. Quite frankly, if you try and track too many KPIs, you might as well just not track anything at all.”
Choosing the right KPIs for each project is of the utmost importance. For example, make sure the KPIs align with your overall goals. Avoid the temptation to track too much. Focus on the KPIs that have the greatest impact on revenue and profitability, as these will provide the best indication as to whether a particular initiative is contributing to healthy growth.
Create Customized Dashboards
Having an idea of which KPIs are most important to individual departments within your company is a good start. But without a solid framework for collecting, reporting on and acting on that information, the right KPIs won’t do you much good.
Because of this, business executives must ensure they have solid systems in place. They collect quantitative data from all departments. Tools can automate the collection and sharing of this information. It presents the executive team with a clear, up to date picture of the status of projects and initiatives.
The use of predictive analytics tools can prove a further benefit. They analyze how different courses of action could affect future company outcomes. A dashboard can link to your KPIs. This results in better-informed decision-making for more effective growth.
In an interview, Bhushan Ekbote, director of sales at Dell, provides a clear example of how large of an impact such dashboards can have. “One company I worked with struggled to accurately predict monthly revenue because of its heavily inbound revenue generation model,” he recalls. “By creating a predictive model that factored in pattern recognition, seasonality and promotions, we were able to achieve 98 percent forecast prediction accuracy. Clearly defined sales stages made it much easier to accurately predict sales and conversions.”
Focus on Key Financial Areas
It should come as no surprise. Your finances remain a key indicator of your business’s health. In fact, 82% of startup failures result from cash flow issues. For example, companies should prioritize their liquidity ratio. This means their ability to fulfill short-term debts. A strong cash flow enables you to get loans for future business investments. It also helps you manage ongoing needs like salaries and taxes.
An accurate understanding of your financial health requires going beyond revenue numbers alone. As a result, in an article for Inc., J.P. Morgan’s Jill Hamburg-Coplan actually recommends executives focus on seven financial factors. These include current ratio, quick ratio, return on assets, accounts receivable turnover ratio, operating cash flow ratio, pretax net profit margin and inventory turnover.
These factors offer a broad picture of your financial health. For example, the current ratio compares current assets and liabilities. A 2:1 ratio is considered to be a healthy margin for most businesses. Return on assets compares the net pre-tax profit and total assets. And this helps you determine if you are using assets appropriately. Inventory turnover tells you how many times you sell your inventory. Calculate this by the year — the higher, the better.
Predictive analytics tools should also play a role. They help you evaluate these elements of your company’s financial status. Get a better understanding of how certain actions will affect these ratios and margins. This allows you to reduce risk as you make crucial business decisions.
Create clearly defined KPIs that address your company’s financial status. And track the progress different departments make in achieving their individual goals. You will have a greater understanding of where your business stands.
Most importantly, put yourself in a position where you can accurately track the health of your small business. This will enable you to address challenges and make smarter business decisions to ensure an even more successful future.