What are the Critical Numbers in Your Business?
What are the critical numbers for your business? Most of us accountants will say they’re your sales figures, your gross profit, your break-even point, your working capital cash flow requirements, your aged receivables level and your stock turnover needs. These numbers are important because just like a personal trainer measuring your weight and your stamina levels etc, they’re needed to be measured as they are the indicators which tell you how your business is doing.
But that’s the Score!
Critically though, these numbers are the score on the board. They don’t, however, tell you anything about how the business is going to perform in the future. For this we need to look behind the numbers, what drives the score. For example, what is it that drives sales? Is it the value of orders booked, or the value in your pipeline, or for a transactional business, is it the number of outbound calls being made, sales visits or click throughs so in your website.
Next you must know how your numbers are trending. This means understanding the changes to your numbers as they occur over any one rolling period. What is the appropriate length of a rolling period? It is the period which is long enough to show changes that wont be due to the impact of seasonal or economic cycles and are long enough for have absorbed the effect of some repetition of the change strategy. Rolling periods can be over the past week, the past month, the past 3 months or the past 6 months or over whatever period makes sense in your business.
Then you need to set your critical numbers into a context (a comparative period, a forecast or a budget). Why? Because if there is no context, you wont know if the number or the trend is a great one, an average one or a poor result. The context is provided once you set an ideal target number for each of the critical numbers.
Having the trend data and the forecast, you can make decisions as to what needs tackling first, how quickly that needs addressing and how you are going to go about changing the number. After that, its a question of letting the new strategy run for a while so that you give it a chance to work, to alter the pattern or trend.
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