5 Ways to Make Business More Obvious
We live in an era of relativity. I don't mean Einstein's theory of relativity, but rather one of truth, ethics and morals. The well documented problem with so-called moral relativity of course is that the theory itself is self-defeating and does not make any sense. However, the idea that what is true for you is true for you and what is true for me is true for me persists.
What does that have to do with your business? First, it is extremely easy to fall into the trap of hearing a positive story then thinking everything must be OK. We must be on guard that when we say things are OK, and assuming everything is OK, or we will miss an opportunity to fix a problem. Second, because many people don't take the time to define what is quote “good” or “bad” everything ends up being shades of grey and nothing is black or white. Business is hard when everything is a shade of grey. Really hard.
So, what are some steps we can take to start putting in concrete and obvious agreed upon metrics? We have now entered the second phase of the stage decision layering model. As a reminder the first stage discusses what the results are and comparing that to history. It is a discussion about what happened. Second stage deciphers what those results mean. To have meaning there needs to be some foundation for truth. We must discuss and define what we will consider good and bad. Once we set these definitions, business becomes much easier and more obvious.
Fortunately defining truth in business is much simpler than you may think. You already produce basic financial statements. You also have some unwritten rules of the business that you use to gauge how comfortable you are with how things are going. All we need to do is to spend the time and energy to commit these things to paper. Write them down any way that is easy to measure. A couple of quick guidelines will help narrow this field for you.
Business metric truths:
A cash flywheel that spins faster is better than a cash flywheel that spins slower
A cash flywheel that spins bigger is better than a cash flywheel that spins smaller
An increase in profitability (defined by a percentage of sales) is better than a decrease in profitability
An increase in gross margin (cost of sales as a percentage of revenue) is better than a decrease in gross margin
A decrease in total debt is better than an increase in total debt
There are others of course, but these five will help business owners determine if things are going well and if things are getting better or worse. The underlying beauty of everything that is noted above is that there is no shade of grey anywhere. These are five black-and-white metrics that are easily calculated and reported using information you already have. No three-day retreats with senior management required.
It is worth noting that having clearly defined, obvious metrics will make some people very uncomfortable. Sometimes that's just a function of a fear of being measured. To some people it will feel like we are being very rigid when we used to be able to use management discretion. Still others will lash out by saying these numbers do not apply to them or their industry. I can assure you these concerns are very real but also very short-sighted.
The best analogy I can think of as it relates to having obvious black-and-white metrics is another item that deals in black and white. A piano. I look at the keys covering a piano and I'm instantly overwhelmed and cannot begin to understand how somebody can use that to produce amazing music. My children on the other hand, have taken the time to learn the theory and set basic expectations, naturally and easily see music instead of black and white keys or black and white notes. They overcame the fear and discomfort of not knowing to be able to make sense have something that was otherwise gibberish. Defining clear metrics so we can understand how businesses are doing is much the same thing. The metrics I gave you above will serve as your piano lessons.
