Part 1 of my 10-part series Top 10 Mistakes Small Business Owners Make and How to Avoid Them.
Mistake #1: Small Business Owners Measure the Wrong Things
Peter Drucker once said, ‘If you can’t measure it, you can’t manage it.’
So as a business owner you’re faced with some tough questions.
- What are the metrics that drive your business?
- Are you measuring the right things?
- How do you choose from all the available business measures to know if you’re on the path to financial independence?
The problem with traditional business metrics is that they don’t draw out a clear connection between what we WANT to achieve and what we DO to get there.
For example, say you want a million dollars in the bank.
So every morning you wake up, log in to your online bank account and check your balance. Do you have a million dollars yet? Nope. Ok now what do you do with the rest of my day to change that? Geee if I don’t go out to lunch I’ll save $3.95 towards my goal. Yipeee.
Simply put, business owners have to have a feedback mechanism which helps them manage their business on a day-to-day basis.
So, what are the metrics that drive your business?
All businesses measure profit and they always will. But, you can be wildly profitable and still have no cash in the bank. Maybe I shouldn’t have purchased that new computer because now I can’t pay the electric bill.
Don’t get me wrong. I’m a CPA. I LOVE to go up and down a P&L and analyze the heck out of it. But what does it tell me about managing my business?
Perhaps it’s one of your measures of success. But it’s not going to help you on a practical level. In fact, more than likely it’ll leave you spinning your wheels.
I’m not saying discard profit entirely. In fact, it’s still probably going to one of your key long term metrics. But if you want meaningful measures that actually help you manage your business, you’re going to need to dig deeper.
A better approach:
Let’s assume we have a clear long term vision. That’s a must.
How will you measure that success? For argument’s sake, I’ll just pick some classic ones out of the air.
- One million dollars in the bank and no debt.
- Annual (cash) profit of $350k off a million dollars in revenue
- 6 months worth of engagements booked in advance
- Working only 35 hours a week
Now we need to connect the dots between what we WANT and what we DO.
So we need to do three things:
- Identify what’s preventing you from reaching those goals
- Employ Pareto - prioritize one or two high leverage projects that that you can start on IMMEDIATELY to bust down those walls.
- Establish measures of success for THOSE items
Once you’ve aligned your projects to your long term goals, you can have the confidence you need to really focus on the success of your current initiatives. All while knowing your on course for success in the long term.
Unfortunately, this is not one rinse cycle. You need to constantly measure, compare results to expectations, and repeat. Eventually through rigorous application, you’ll find your knocking at the door of your long term goals.
The challenge here is each business is different. So while one set of metrics may be perfect for one business, they may probably won’t work for YOUR business.
In my experience, I’ve found that successful small businesses can really only look at 3-5 top-level metrics at a time.
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