Nevada’s economy makes it fairly easy for businesses to make money right now. A bull market allows even idiots to get rich. But short-term vision does not yield long-term profits, even in a strong economy. Tracking business performance is like a good eye exam — it allows you to see clearly where your business is and helps determine which course to take.
“If you don’t track business performance,” says Keith Schwer, Ph.D, “the market will.” Schwer is the director of the Center for Business and Economic Research and a professor of economics at the University of Nevada, Las Vegas, and he doesn’t say such things lightly. He emphasizes that keeping on top of the numbers is a critical part of good management. It is not a static exercise, but rather a way of life that should be a constant part of the decision-making and evaluation process. In fact, Rod Jorgensen, director of counseling at the Nevada Small Business Development Center, adds you should be proactive about keeping track of the numbers you will need, just as you are with your budget. It is important in every business to know whether fixed and variable costs are being covered, whether money is being made, and to make reasonable projections about what might be encountered in the next year or two. This is done by monitoring the numbers, by studying past and current conditions — both those inside and outside your control. Never assume you are immune to issues of our nation’s tax policy, monetary policy and what’s up with the federal reserve. Nor should you ignore the international financial climate, says Thomas Cargill, professor of economics at the University of Nevada, Reno.
Keep It Simple
Though the analysis can be complicated, the tracking portion is not. All you really need, according to Cargill, is a personal computer and a spreadsheet program such as Excel. He recommends a spreadsheet over accounting software such as Quick Books because each serves a different purpose. An accounting program is mostly designed to get you ready for tax season, and extracting pertinent information for tracking purposes may be more trouble than it’s worth and can be tainted by other information the software deems important. With a spreadsheet, you choose what categories to enter and how to arrange them. After that, it’s just a matter of getting into the habit of entering the numbers in the proper columns. By staying on top of it, you can take a proactive approach to recognizing and solving problems and minimize any harm to your business, rather than discovering the trouble at year-end and possibly losing the company.
When you track your numbers, remember to look at everything as a percent of sales or revenue. Higher wage costs in May 2000 may not be worse than lower costs in May 1999 if sales have significantly increased. Costs do not occur in a vacuum. It also helps if, when tracking dollars, you start with your largest outflows and then work your way down. For example, a restauranteur knows his or her biggest costs are food and labor. Even if he or she has no time to track anything else, those two categories are a priority.
Making Market Comparisons
You may also want to check your business’ performance against industry averages. Jorgensen suggests periodically (more frequently in the beginning) checking these standards with a primary association for your industry and tracking your percentages compared to industry norms. But keep in mind you don’t have to exactly fit the norm, just use the numbers as a bellwether of how you’re doing in relation to your peers around the country. Once you are comfortable with how your business varies compared to the average, you can make assessments based on previous performance, and then compare it to industry norms once a year or so.
Another way to compare your business to others is to check how it is doing locally. Cargill suggests tracking taxable sales for your county to see if your business is growing in relevant measure to the local economy. Staying aware of the economy as a whole will always help you make better business decisions, but it is a simple thing to overlook in the day-to-day hustle, while trying to satisfy demand, costs and debt.
Acknowledging your company’s vulnerabilities is also fundamentally important. Is your business sensitive to interest rate fluctuations? If so, are you studying the appropriate indicators for trends that might signal a rate change?
When choosing what expenditures to watch says Cargill don’t ignore the little things. Many a business has been nickeled and dimed to death. Cell phones, travel, entertainment — these expenses can add up more quickly than you might think. By keeping tabs on seemingly inconsequential costs over time, you can predict your needs and adjust accordingly before your profit margin begins to erode.
Know Your Customer
Another key indicator of business performance is customer satisfaction. Evaluating product and service satisfaction is more complicated than entering numbers in a spreadsheet, but well worth the effort. Schwer suggests looking at all areas of your business, from personnel to product development — take your business apart. “Start at the market end,” he says, “and work back.” Customer satisfaction surveys generally contain a wealth of valuable information. Use that information to generate a responsive feedback system that will initiate actions to improve your product or service. Once again, recognizing the sensitivities inherent to your business is essential. “In a technological society,” says Cargill, “knowledge is power.”
However, if you don’t have that knowledge, don’t despair. Jorgensen recounts how again and again he sees people decide they don’t understand the issues and just hope for the best. Their discomfort level with numbers, or any other method used to evaluate performance is so high, they cannot convince themselves to learn how. Don’t allow that happen to you. It’s not that difficult to get up to speed, and there are myriad resources available to help you along.
Cargill suggests text books as one source, noting that many are written for the lay person, others for the business expert, so find the level that best suits your spot on the learning curve. Universities and community colleges have bookstores for students on campus, open to the public. And while you’re on campus, you might want to check into taking a course or two or, if time permits, simply call on a professor and ask a few questions. The days of the ivory tower are long past and most faculty members are happy to share their knowledge.
The seminar is another excellent source of information — but be selective. Cargill warns that for every good seminar, there are 10 useless “dog-and-pony shows” happy to charge outrageous fees. It’s the same deal with consultants, so do a little research before you hand over the checkbook. And don’t overlook the expertise in your own backyard. Talk to your accountant or CPA. These professionals work with these types of numbers every day, and are asked to do a lot more than taxes. At a minimum, your advisor may be able to help you set up your spreadsheet after which, you can plug the numbers in yourself on a regular basis.
Vigilance Pays Dividends
No business is an economic island. You must track performance. And just because business is good today, doesn’t mean it will stay so. Sounds like common sense, yet Cargill says many are unable to grasp this simple premise.
Stay vigilant, keep track of everything, even the small stuff, and don’t do it casually. With computers today, tracking performance requires little more effort than entering a column of numbers, but if that column is allowed to remain blank, what does that say about your business?
Now that you’ve had your eye exam, can you see your business clearly, or are corrective lenses in order? Schwer says some owners are unable to acknowledge anything negative about their company; they seem incapable of bringing objectivity to the endeavor. For these people, tracking performance is a futile exercise — if one is not willing to see the truth in the numbers, why bother? That sort of blindness may not put you out of business, but it certainly will keep you running into brick walls rather than joining the superhighway of economic returns. It’s time to get out and drive!