Weathermen forecast spells of rain, sunshine and storms on a regular basis. They use historical patterns of cloud and wind to predict their future course. If this can be done for something as fickle as weather, as a founder you can learn to proactively predict the performance of your business. Here are some tips for you to stay on top of your company’s financial health and predict how things will shape up in the future.
- Know what to measure: There are certain business metrics which are leading indicators of business performance. For example, number of leads generated, and quality of these leads is what will ultimately determine the sales volume. Similarly, number of visitors to a website and time spent will determine sales if you are running a B2C online business. Once you identify the leading indicators of your business performance, you will be able to run your operations proactively, rather than reactively.
- How often to measure: The frequency of measuring the identified metrics, whether they are leading or lagging indicators is also important. If you measure too frequently, the numbers will not provide enough insights. In the same vein, if you measure the numbers at very large intervals, the whole point will be lost, as the horse would have bolted. Therefore, identify the periodic measurement intervals for each metric. As an example, some businesses will need to track metrics like customer returns on a daily basis to ensure they can reconcile with vendors and customers. Other businesses will need to track monthly payments and credit notes to manage cash flows efficiently and gain insights into which customers or segments are more profitable.
- Measurement systems: There is no use of doing the above, if a company doesn’t have the ability to track the metrics. Typically, this would mean something as simple as having a resource to do the basic arithmetic and accounting to calculate the metrics, or on the other hand, having products and tools like Google Analytics or Lead Management Systems to provide the data.
- Insightful reporting: A founder may not always be an expert in finance or marketing. Therefore, the data presented needs to make sense to the lay person by being organized in a way that it is easy to spot trends, find aberrations and capitalize on opportunities. This is one of the most important cogs in the wheel. This can be done by identifying credible services, resources or tools to manage reporting in a manner that makes sense, is insightful and actionable.
Each business is different so you will have to decide what are the metrics which help you manage your business proactively. Once you have the above in place, you will hopefully be able to forecast your business performance with a lot more accuracy than your local weatherman does with the weather!