What to measure in a small business

The biggest mistake that small business owners make from the outset in their business is that they do not keep score. And I do not just mean the money side of things.

Activity leads to Results which leads to turnover, but not necessarily profit.

I met a young entrepreneur of 21 last week. He had been in business for about 6 months mario andrettiand was now looking to expand his business – Fair Play and well done to him for thinking like this. We encourage this type of thinking and wish there were more of it.

His expansion plans would cost €60000. If you spread this cost over 5 years with no interest, this equates to about €12,000 per year or €1,000 per month.

I asked him if he believed that the investment would help him to generate an extra €2000 in sales per month with 50% Margin. He was unsure.

I asked him how much each sale was worth to him. He did not know and had kept no records.

His belief in the product and business were strong. He probably would grow the business by €2k per month. But we should be basing the decision on factual information or at least using some facts to support the decision.

His proposed business venture would not necessarily generate any additional enquiries for him and he was doing all the work that presented it self to him as it was. SO where would the extra €2k per month come from. In his business, this would represent about 15 extra jobs per month. That was a lot.

Base your business decisions on factual information where ever possible. Your chances of success are higher or your risk of loss is reduced.

What gets measured gets managed

If you have ever played a game, be it football or tiddly winks, you will most probably have kept score. The same is not true in many businesses and consequently business struggle and fail to take corrective action quickly enough – because they are often unaware of subtle changes taking place.

There are financial measures and there are non financial measures in every company. It is easy to measure turnover, and cashflow and wages etc. It is not easy to measure and then understand the activities that lead to the turnover, cashflow and wages. And it is this lack of information that leads to many business mistakes.

For example, if business A had a turnover of 100,000 and business B had a turnover of 80,000 we could easily assume that A was a better business. But we cannot tell anything from turnover.

If Business A had a Net Profit of 10,000 and Business B had a Net Profit of 9,000, we would again think that A was a better business.

But what if Business Owner A had to spend 15,000 to get that level of sales while Business Owner B only Spent 1,000

What if Business Sales Manager A required 10 inquiries to get every sales, where Business Sales Manager B only required 2 inquiries.

What is business A had a gross profit of 40% while Business B was making 55% while selling the same product?

What if Business A realised that no enquiry over the past year had come from his website, despite spending thousands on its development?

What if business B realised that 20% of all his enquiries were as a result of one happy customer singing their praises?

What if the receptionist at company A always informed inquiries that they would be called back but never passed the message on?

What if one sales person in the business was visiting 10 customers per day and the 2nd sales person was only visiting 5, struggling but unaware of what they should do?

What if the supplier for company A was actually charging them 5% more than their competitors because he knew he could get away with it?

What if company B had a wage figure which was 15% higher than their immediate counterparts.

Imagine if you had every available piece of information about how well or poorly your business was doing. Would some of your decision have been different and would you have focused more on sales and customers and less on rules and regulations.

We call all of the above Key Performance Indicators (KPI’s). Do you have yours?