According to the Small Business Administration (SBA) office, only 80% of businesses survive the first year and only 50% survive beyond year 5. There are a lot of reasons for this from understanding the market, pricing, capital, and many more. Small business leaders get started with a product that they believe is exceptional and people want. Sadly when the business gets going, that's where the preparedness ends.
Business owners who would consider themselves "ahead of the curve" can quote figures from their financial statements like their Revenue, Gross Profit, Net Income, Accounts Payable balances, etc. This is a good start.
At Velocity, we believe in driving business performance by planning your business based on leading indicators that drive this financial performance. If your Net Income or Net Income Percentage (New Income / Sales) are declining, why? What metrics should your company track that would be leading indicators to financial success or failure?
The options are many. Here is a listing of some top focus areas for companies to demonstrate sustainable performance:
- Labor Efficiency - how much labor was used versus how much labor should have been required?
- Material Cost Variance - how many materials did you consume versus what should have been required?
- Competition Based Pricing - review of pricing compared to competition and evaluation of whether pricing makes sense when considering variables like location, quality, and other factors
- Sales Conversion Rate - how often do you convert a prospect into a customer?
- Revenue Trend - evaluation of period over period change in revenue (dollars and units)
- Inventory Turn Rate - different businesses require different turns but efficient use of inventory frees up working capital for other uses
- Quick (Acid Test) Ratio - are you able to pay your current liabilities based solely on your cash on hand and open receivables?
Among others, these metrics should be a part of every businesses planning cycle. Whether you're a small business reviewing performance quarterly or a large company with a more frequent S&OP cycle this review is critical.
If your company is evaluating and optimizing these metrics then your performance and sustainability will move lightyears beyond simply reporting your Income Statement and quoting lagging results. You will understand the drivers of success and longevity. You'll know that you're efficiently utilizing materials and labor, you're able to pay your bills without difficulty, that you're priced right compared to market, you're growing your customer base efficiently, and not tying up valuable working capital in inventory.
As leaders, your companies should be speaking in these terms, reviewing these metrics, and adjust plans and processes as performance in any of these areas falters.
At Velocity, we would love to help you. In these uncertain times, it is our hope that we can support the sustainability of every business we advise. Get started today!