The Importance of Understanding Your Numbers

The Importance of Understanding Your Numbers

 “Know your numbers is a fundamental precept of business” Bill Gates

Knowing your numbers in business will enable you to make better decisions on taking the right steps forward.  Knowing your numbers will help you in minimizing risk and avoiding mistakes, mistakes that will cost you Time, Energy and Money … 

The risk in not knowing your numbers is like heading to an unknown destination without a compass and zero visibility.  In other words you are in survival mode blindly following a path that leads to nowhere. 

In the modern game of sport, the coach has a team of support staff who monitor individual statistics of the players and the game, including the score, that allows the coach to make changes throughout the game to address areas of concern that may impact on the final result of the game.  It is no different in business. 

Think of the numbers in your business as being the score or metrics in the Game of Business.  The numbers allow you to track what is working well and what is not working so well.  When you know and understand your numbers, at a glance you can identify specifically, the areas that you will need to focus on to make any necessary changes that will turn a negative result into a positive result. 

The numbers, or metrics, in business are typically referred to as Key Performance Indicators or KPI’s.  The KPI’s will vary from business to business and industry to industry.  The KPI’s can be broken down into the following categories: 

• Financial KPI’s
• Operational KPI’s
• Sales & Marketing KPI’s
• Costings KPI’s
  

The first step is to identify the KPI’s (or numbers) that you MUST track that drive your business, these are the numbers that help identify if or when a business system is not performing to the expected level.  

In most cases it is important to keep the maximum number of 5 KPI’s in each area of the business. Having too many KPI’s to measure can over complicate the measurement process and confuse the overall Key Performance Areas of the business.

The Financial KPI’s 

The most important financial numbers are your Profit and Loss and Balance sheet reports.  From these reports you can generate the KPI’s Dashboard that will enable you to establish the financial position of the Company at a glance. 

Typically the Financial KPI’s might include: 

• Revenue
• Gross Profit and Margin
• Net Profit and Margin
• Debtor Days
• Revenue per employee
• Current Ratio
• Debt to Equity Ratio
• Inventory Stock Value
• Inventory Stock Turns
• Average $ Sale
  

Operational KPI’s

The operational KPI’s are the numbers that you can measure to establish how well the operations side of the business is performing.  Examples may include: 

• Lost Time Injury Rate (LTI)
• Overall Operating Efficiency (OEE)
• Delivery in Full on Time (DIFOT)
• Absenteeism Rate
• Manufacturing Yield Ratio
• Wastage
• Employee Turnover Rate
• Overtime Hours
• Customer Complaint Ratio

Sales & Marketing KPI’s

The Sales & Marketing KPI’s tracks how effectively marketing a sales processes are working and helps identify what is working well, and keep doing it, or what is not working so well so that it can be stopped and other alternative activities can be test and measured.  Examples may include: 

• Monthly Sales Growth
• Cost Per Lead (CPL)
• Cost Per Click (CPC)
• Sales Conversion Rate
• Marketing ROI
• Customer Acquisition Cost
• Customer Lifetime Value
• Sales Pipeline Value
  

Costings KPI’s 

This is an area that many business do not track and one that has the highest risk and potential for financial losses in a business.  The Costings KPI’s ensure that costings are kept up to date with movements in material, labour and overhead recovery costs.  Examples may include:

•  Monthly Materials Cost Review
• Project/Job Actual vs Quoted Variance
• Cost of Goods Sold (COGS) Margin
• Overhead Recovery Ratio
• Labour Cost Ratio

On identifying the right Key Performance Indicators that you need to implement, measure and track in your business, create a simple Dashboard that allows you to consolidate all of the KPI results on one page.  Ensure that you include a benchmark number that sets the Goal to be achieved for that particular KPI. 

The key to understand and interpret what the numbers are indicating, is to have a complete understanding of how the numbers are being measured as this will in turn bring an understanding of what the numbers actually mean.  

Specifically, when you understand the meaning of the numbers, you can look for trends that will then trigger a closer look at what is/may be happening that will lead to making a decision on what action then needs to take place to bring the numbers back in line. 

“If you don’t know your numbers, you don’t know your business” - Marcus Lemonis

 If you have any Questions, please reach out, I am here to help …