Don’t Just Go With Your Gut!
This post is about how the right business numbers can help you make decisions.
Managing a business is tough, whether your business is growing, is stagnant or declining you still need to make decisions.
Decisions that can have a huge impact.
I have always been interested in how decisions are made; what process do we follow to arrive at the right answer?
Many business owners, ultimately, rely on their gut feelings to decide the best course of action, but what is a gut feeling?
A gut feeling is actually another word for your instincts or intuition. Have you ever had the feeling, when walking down a dark street at night that you are in some sort of danger? You can’t prove it but you just know that walking down that Dark Alley would be a bad idea. This is your body and your mind working together to help you survive a potentially dangerous situation.
The same thing happens when you make a decision for your business using your gut.
When you run a business, your brain is in tune to it, you pick up stimuli about your businesses current situation all the time both consciously and subconsciously.
When you make a decision, you use a combination of past experience and everything you know about the current situation to make a judgement.
Most of the time, gut feelings aren’t wrong. However, problems can occur because these two types of inputs into the decision making process can steer you down the wrong path.
Firstly your past experience can be wrong!
For example, your past experience can negatively impact on your ability to take risks. If you have been burnt in the past, you may never take that necessary risk.
Your current experience of the business may also be wrong.
For example, if you are the problem solver in your business, then your image of the business is skewed because on a daily basis you probably only ever see its problems. You are faced on a daily basis with problems and it’s as if the successes are hidden from you. This naturally can skew your image of the business.
This is where the numbers in your business can help.
The numbers in your business help support your decisions by giving you the proof you need to support your gut feeling.
In addition, numbers can help you get an understanding of the bigger picture in your business.
These numbers, or Key Performance Indicators, can help balance your view and plug into your past experience to help you make the big decisions.
The numbers in your business come from two places. Firstly your Accounts; both annual and management accounts, these give you an idea of past and current financial performance and secondly from anything else that is measurable in the business.
Accounts.
Annual accounts are produced once a year and, in our opinion, are of limited use because they are inherently out of date. However, they do give you an idea of totals over the year and an idea of your net worth (The accumulated profit position of the business).
Management accounts are produced monthly or quarterly and are more of an updated version of the annual accounts. These take a little work to get out of your accounting system, but are the most up to date version of the historical financial data.
Other Metrics
There is a long list of items you can measure in your business and the trick is to identify which ones are key to you.
Here is a list of 9 essential items you may find useful to measure:
- The number of phone calls made by the sales department or by each salesperson
- The number of leads generated by marketing activities
- The amount of cash in the bank
- How quickly your customers pay you
- How quickly you pay suppliers
- The number of days stock you hold
- Your Gross Profit %
- Your break event point
- How many sick days employees have
The list of potential Key Performance Indicators is very long; the trick is identifying which numbers in your business are right for you.
Once you have identified your key metrics then you need to set up a mechanism for collecting and recording these.
Making the right decision is much easier when your gut and the numbers agree.
