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Path to Business Tracking with Debbi Allison
By: Jessica Rickard | October 6, 2021
When running a business, tracking different measurements and reaching goals is crucial to success and growth. Without tracking progress, you don’t know where you are or how close you are to reaching the goals you have set. So, first, you need to establish goals that you want to achieve and then determine which milestones will help you get to those goals. Finally, you need to decide which measurements you need to track that will help you reach those milestones. Measurements, milestones, and goals all need to be established for the business.
The goals that you set for your business will be different than other businesses, so it is important that you really focus on your vision for your business when determining goals. Every aspect of your business needs to be vision focused in order for your business to succeed.
A good place to start is making sure your numbers are clean. Build integrity for your business by staying in compliance with every part of the business. In order to create a strategy, you need to set clear, focused goals and analyze business data on a frequent basis: not just annually, but monthly, weekly, or daily. Once you create that strategy with relevant goals, you need to determine which metrics you are going to track. These metrics are called Key Performance Indicators, or KPIs for short.
Using an application like Path in conjunction with QuickBooks Online helps you monitor those KPIs on a frequent basis. You can use the Bridge as a place to communicate with your advisor and team. This creates accountability and support and starts building a dialogue that leads to better decision making.
Not every business is the same, but there are three common KPIs that you should be tracking:
- Net Profit Margin - If you aren’t turning a profit you won’t survive
- Burn Rate = Total cash/ days cash on hand - How fast you spend your money is called your burn rate. If you don’t have enough money coming in to cover what is going out that is negative cash flow. And to be clear you can turn a profit on your Income Statement and still have negative cash flow. Many of your expenditures are reflected on your balance sheet, not your income statement. These include major purchases of assets, the payments made on your loans, and member distributions.
- Gross Profit Margin - The Gross Profit Margin is calculated by taking total income less COGS divided by total income. It is the most common KPI used for benchmarking. Benchmarking is when you compare your business to other businesses in the same industry. Since we benchmark as a percentage of total income, the size of the businesses we are comparing our business to doesn’t have to be an exact match.
The biggest problem with benchmarking is that we are usually comparing ourselves to the average. Average businesses go out of business every day. The failure rate is high, very high. You need to do better than average for your business to just survive. Which is why I like to set a custom goal on both GPM and NPM. Path makes setting and track a custom goal easy in the Industry Comparison.
Those three KPIs are a great place to start. To really stay on top of your business data, you should track at least 3 more KPIs. These next three metrics should be centered around your goals for the business and line up to your business strategy. They may be something like spending only 2 percent or less of revenue on office supplies or determining average revenue per customer with a goal of a 5% increase in sales using price increases or upselling additional services. They also might not even be financial in nature, like a restaurant determining how to positively increase the average number of table turnovers in an evening.
Never closely track more than 10 KPIs at any given time. If you do, you will find yourself trying to do too much too fast. Too many variables means that when something fails it is a lot harder to determine why and fix it. And when you are juggling too many changes you might not even have time to fix it; much less notice that something is wrong.
As you achieve your goals, the milestones should be documented. How did you reach your goal? What steps were taken and which decisions were made? This makes it easy to replicate successful processes and avoid mistakes. Success is even more fleeting when you don’t remember it, so make sure you document everything. Documenting these things and giving credit to those who deserve it build a sense of pride inside the business and puts everyone on the path to success.
This article was written by Jessica Rickard of Simplex Financials, Inc., in conjunction with Debbi Allison, Owner of Open Book Consulting.