Last year is wrapped, the budget for the new year is done, and you are ready to execute on the goals of the coming year. Yours may be one of the many small businesses that is already off plan. That could be because the budget process had flawed assumptions, or it could be because the business has not performed to expectations. Do you really know how to tell the difference? We find all too often that businesses are relying on false positives and false negatives. Here is how to avoid that happening to you.
So how do you know if you are executing effectively?
• First and foremost, there is too much focus on the what, not the why. It is critical for a business to know whether it is on track or off track. Adopt this mindset, ask probing questions and truly understand what is happening at a root cause level. A common example of this we see is the example of a miss in sales. Were sales below forecast because buyers have cut back orders or not ordering in the volume expected? Or is it simply a delay that will mean larger revenue in a future month? One is a timing difference; one could be a permanent loss in revenue. The insights derived from that understanding, and the action the business should take accordingly are likely very different. However, if leadership is just focused on the gap to budget, opportunities for lasting improvement could be wasted.
• Reflect on the process of creating your budget. What was the decision process you went through to decide on revenue targets? On hiring? On marketing spend? We find many entrepreneurs go through this calculus in some form or another primarily in their heads as they make decisions because they are so steeped in the business. Getting those decision criteria out onto dashboard or scorecard to track consistently and validate those ideas is critically important to being able to grow and scale the business. It is also incredibly helpful to have this information memorialized to help future planning as well as to illuminate where an assumption may not have been based in reality.
• What are the 3-6 really critical metrics that drive your business? Put them down on paper and start to track them regularly. Start small and don’t overcomplicate it. For some businesses, the concept of regular metrics is overwhelming, for others, there is so much data, simply distilling it down feels too labor intensive. Metrics can and often should be simple, such as: Revenue per Widget, Marketing Spend as a Percentage of Revenue, Revenue per Number of Employees, Widgets Produced per Month, etc. And make sure these metrics are balanced based on the business, and not too narrowly focused so you get a glimpse of the whole business. These high-level metrics will lead you to look deeper at what really moves them and they will likely evolve over time as your business does. The results of tracking these metrics may validate the theories you have known all along, or they may surprise you and take you in a completely different direction.
• Use it to make decisions. This is not an academic exercise. Make sure you understand how the learnings above drive decisions for future action in the business. There are plenty of businesses that do some or all of the above steps, and then stop there. Don’t let that be you. Put it into action to propel the business, and if unsure how, leverage your team and strategic partners to support you in unlocking how.
Your business is a constantly evolving organism. Your planning and monitoring process needs to evolve at the same speed. A good financial review should always include an overview of performance against budget in addition to key metrics (called KPIs, or Key Performance Indicators). Understanding why the company did or did not meet the budget is just as valuable as what the top line or bottom-line numbers are. Be a student or your business, the homework will pay off.