Business success depends on a myriad of factors that, when working in synergy, are responsible for a well-functioning operation. But how do you truly know you’re successful?
The best way is to measure those factors to see how well they’re performing. This in turn allows you to manage them, and managing them well will help you cultivate success repeatedly and consistently.
Rather than get overwhelmed by the seemingly endless barrage of possible metrics to keep track of, focus on three core areas. When measured, these elements will help you manage the success of any operation: finances, consistency, and satisfaction.
Not everyone nerds out over the numbers, but all business owners should keep current with the state of their finances. Begin your financial management journey in these three main areas.
Financial status reports
Generating financial reports doesn’t have to be overly complicated. If you do your own bookkeeping, there is easy-to-use software (like Quickbooks) that makes it pretty simple. And if you work with an accountant, be sure they review your basic reports with you at least monthly (if not weekly).
These are the basic reports that should be checked consistently:
- Provides a snapshot of your finances, focusing on assets and liabilities
- In short: It tells you what you owe and what you own
Profit and loss (also known as an income statement)
- Gives a window into the health of your operation with the ability to compare figures across various timeframes
- In short: It tells you your current income
- Lets you know how much of a financial cushion you have to work with
- In short: It brings cash influxes and outflows to your attention
Accounts receivable aging summary
- For businesses who invoice clients regularly, this is a key report to run
- In short: It tells you who is paid up and who is overdue
Regularly reviewing your financial status reports is more than just ensuring you have enough money to pay the bills. You’re also looking for outliers that may indicate issues or opportunities:
- A boost in sales of a particular product may indicate the success of a new launch or a change in customer demand for a current offering
- An abnormally high utility bill may tell you your HVAC is on the fritz
- An outstanding invoice will trigger you to send a payment reminder or escalate to collections
Having a solid understanding of the margins you operate under is a key factor in managing a successful business. Whether you’re selling physical products or professional services, knowing your margins is crucial in order to appropriately set and update prices.
The term “margin” for this discussion means profit: the difference (typically measured as a percentage) between the dollar amount you receive for a good or service and its cost to you to provide. There are four types of profit margins, all tied to one another: gross, operating, pre-tax, and net.
Begin with calculating gross margin. The gross margin is the profit you make on a good or service before you take into consideration things like overhead and taxes. It only measures the direct cost of the item/service itself against how much you charge for it. It’s a gross, or general, measurement of how much you’re making.
% gross margin = [ (product revenue – cost of goods sold (COGS) / product revenue ] * 100
You can run this formula on a specific product, branch of your business, or your entire operation to get a general idea of how much money you’re clearing. For a full understanding of the profitability of your business, you’ll also need to calculate the other three types:
- Operating = incorporates indirect costs—not just those directly attributed to your goods/services—that it takes to run your business. This includes things like utilities, rent, and advertising.
- Pretax = adds all debt-related interest expenses and other charges or cash inflows not related to your primary business operations.
- Net = accounts for all taxes paid, giving you your net income.
To learn more about the other three types and how they can help you manage your business, check out this Investopedia article that breaks it all down.
Measuring margin leads to the question of what a “good margin” actually is. That completely depends upon your industry and particular business model. For some, 20% is great but would be a death knell for others. The better the margin, of course, the more leeway you have to both grow your company and weather the storms that come with running any business. Not staying on top of current margins can erode profitability, and you could find yourself barely breaking even, or worse, losing money.
Inventory management falls under financial measurements due to its direct effect on profitability. Depending on your type of business, staying on top of inventory is a key component to managing your success.
Tracking inventory allows you to determine what’s going on with specific products and adjust accordingly. You’ll be able to do things like identify hot sellers that signal you to increase your minimum ordering or cull items that are languishing on your shelves.
When dealing with perishable or “best by” items, also remember to account for any losses you have when out-of-date units have to be pulled. Losses like that cut into your margin, silently eroding your profits if you’re not keeping track.
Inconsistency in business is a surefire way to kill even the most popular, seemingly successful operation. Customers expect to receive the same level of service, attention, and quality every time they interact with you. If you’re on one day and off the other, the chance of them coming back lessens. Focus on being consistent in these key areas: sales trends and quality control.
Sales are never completely consistent. So should it be included under “consistency” measurements? Because understanding the ebb and flow of your sales over the week, month, quarter, or year will significantly help you manage not only your cash flow but other aspects of your business.
This in turn allows you to offer a consistent experience to your customers no matter what’s happening behind the scenes. You can plan better for large purchases, know when to hire part-time or temporary help, and set aside reserves for known lean times of the year. All of this smooths the inevitable rough spots in your operation, allowing you to show a consistent face to the buying public.
These are some basic sales trend factors to start with:
- Seasonality, and other regular fluctuations, to chart expected ups and downs
- Year-over-year sales comparisons to show you longer arches in the rate of growth or shrinkage
- Sales volume of individual products and services to see what’s hot and what needs to be cut
Whether you’re in manufacturing, service, or retail, maintaining consistent quality of both product and experience is crucial to any successful business. Not only is the product or service quality important, the manner in which you deliver and your customers receive it are equally weighted parts of the equation.
Be sure to regularly assess these areas:
- If you’re in the business of making a physical product, no matter what it is, ensuring its consistency is imperative.
Key recommendation: Have your SOPs (standard operating procedures) well-defined and clearly communicated to your employees, with a system of checks and balances in place to ensure consistent product creation.
- Being in a service-centered industry doesn’t preclude you from measuring and managing the consistency of your offerings.
- Know the depth and breadth of what you provide and clearly communicate that to your clients, ensuring what you deliver is what they expect.
Key recommendation: Track aspects like billable hours and add-on services to monitor the quality of your internal process; this helps you both capitalize on additional sales opportunities and avoid cutting margins.
- It’s your duty to set your employees up for success, so give them the tools they need to provide you and your customers a top-quality experience.
Key recommendation: Create and consistently follow an operations manual and conduct regular employee reviews, allowing employees to give you or their direct manager constructive feedback (dive deeper into the secrets to happy and successful employees).
Business success is directly tied to the satisfaction of your customers, employees, and ultimately yourself. Mistakenly thought of as an esoteric metric, satisfaction can be quantified using the criterion described below.
Your process for customer interaction should be well-defined, clearly communicated, and stringently adhered to. Consistency, as stated earlier, is key to customer satisfaction. You can measure their satisfaction level in a number of ways:
- Customer-based review avenues, like Yelp, offer invaluable data on the state of overall customer satisfaction with your company.
- Even the most “out there” reviews hold insights into how you can improve your operation.
- Surveying your customers doesn’t have to be expensive nor complicated.
- Simple paper surveys at your shop, a single question from an employee at checkout, or an electronic survey (created via software like SurveyMonkey) and sent out via your newsletter are all great ways to assess customer satisfaction.
- The holy grail of any business is the return customer. The way you keep them coming back is to ensure their satisfaction with each interaction.
- Chart retention by creating a customer database that tracks purchases.
- Programs like Shopify that tie into your online or brick-and-mortar point of service system make tracking customer purchases seamless.
Satisfaction is not the sole realm of the customer. You want to be sure your employees are happy to be working with you and your customers. Here are three key metrics you can employ to measure and manage employee satisfaction:
- If turnover is high, there is a very good chance your employees are not very satisfied.
- This could be for a number of reasons, from pay to working conditions. Look closely at your operation and see what’s driving them away.
- Check in to see how sales are matching up with various shifts, departments, or even individual employees.
- Dig into their productivity and see how you can help them sustain or improve.
- Employee feedback is a crucial measurement of employee satisfaction, and it goes both ways.
- Communicate openly and honestly with your employees, and you’ll be rewarded with the ability to manage your business to serve not only yourself and your customers, but your employees as well.
Don’t make the mistake of leaving yourself out of the satisfaction equation. Check in with yourself, using the metrics below as a guide, to measure your level of satisfaction with the state of your business.
- Don’t analyze; just ask yourself how you feel.
- That immediate answer is going to tell you a lot.
- How fulfilled do you feel right now as the leader of your business? Are you loving life and grateful for the opportunity to work on your business every day, or is the thought of having to slog through another day killing your soul? Perhaps you feel a bit of both, depending on what part of the business you focus on.
- Take inventory of what is driving those feelings, no matter what they are. Identifying these sources of what fills you up or drains you is going to be crucial for you to manage your ultimate success. They tell you where to focus your attention.
- Are you excited to get up every day or would you rather stay in bed, covers pulled over your head? Bubbling with life or dragging your backside behind you, barely able to move forward?
- Dig in to see where your energy level is and then dig further to see why. Again, identifying the source leads you to those areas you need to pay attention to, be it to cultivate or cull.
- As important as your energy level is the state of your health—the trifecta of body, mind, and spirit. If one or more is less than in peak health, check in to see what’s undercutting your vitality and address it.
- Your business can be bringing in the cash, but if it’s doing so by bankrupting your health, then it’s no success at all.
Just like your employees, you are not a robot with a never-ending supply of drive. If you’re not happy with your business, no matter how well all the other measurements say it’s doing, then your business isn’t a success. At least not for you.
If you find yourself in this place, consider doing some soul searching to determine what truly matters to you for a meaningful, happy life. Then decide if and how your business can support that life.
Measuring the financial, consistency, and satisfaction metrics discussed above will help you manage your business. Let the knowledge you gain from these measurements empower and inspire you to lead your company to the level of success you’re destined to achieve.
The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.