To track your critical numbers is the golden key to a successful business. Most businesses fail as a result of not being able to forecast difficult times and put measures in place to absorb those challenges. If you are one of the few customers we’ve met that exercise this due care already, good for you! If however, you are one of the masses still managing their affairs by looking at the bank balance, we suggest you start to track your critical numbers immediately, even of it is just one or two…
What Are Critical Numbers?
Before you can track your critical numbers, you need to know what they are, so…
Definitions first: Critical numbers are the numbers that determine your company’s success. When they move in the right direction, you know you’re on track toward achieving your objectives.
What the numbers are depends on your situation. For example:
- The crisis critical number. If your business is struggling, your critical number is whatever ensures your survival. Cash in the bank. Reducing debt. Growing sales.
- The basic critical number. That’s the number that has to be at a certain level year in and year out, or you’re in trouble. An airline’s percentage of seats filled. A factory’s output. Revenue per labor hour.
- The weakness critical number. Your sales hover around your break even point. Your return on assets is low, your inventory accuracy lousy. You’re too dependent on one product. Move the number in the right direction, and you eliminate a weakness.
- The opportunity critical number. You’ll rack up sales if that new product is out by August. You’ll land a big customer if you reduce your defect stock rate. A 2% increase in operating efficiency will enable you to undercut competitors’ prices.
How to track your critical numbers for a successful business
Determining Your Critical Numbers
If your company is in crisis, chances are you know the critical numbers already. They’re the ones you worry about in the middle of the night. Otherwise, figuring out the critical numbers is a three-step process.
- Step 1: Analysis.
What are the numbers that must be on track? What are your company’s strengths and weaknesses? Ask managers and employees for input. Talk to lenders, investors, customers. Compare your financials with industry averages. Where are the biggest threats and opportunities in your marketplace?
- Step 2: Objectives.
You can’t do everything at once, so what’s most important to focus on right now? If you have a strategic planning process in place, you already know your key objectives for the next 12 months. If you don’t, sit down with your management team ASAP to determine one or two central goals, if only for the next two quarters. Since a company’s objectives may change over time, its critical numbers may change too.
- Step 3: Determine the drivers you want to focus on.
Here is where companies often screw up because objectives don’t always translate into actions. A goal of lower unit cost, for example, could be achieved by boosting sales volume, by re-engineering business processes, by managing labor hours or inventories more efficiently – or by some combination of these and other variables. What makes sense for your company?
How often should you track your numbers?
Daily, Ron Friedman insists. The CEO of Stonefield Josephson Inc., an accounting firm, says, “Every morning by 9:30, I receive a printed report that tracks certain key results from the day before. That’s a tremendous management advantage. I can respond immediately to any problem signals. Think of all the time and money you lose when you find out about problems only at the end of the week or the month.”
Friedman is convinced that watching numbers daily is as important for his clients as it is for his own 75-person accounting firm. “Depending on the type of business you’re in, the numbers you need to watch this closely will be different,” he explains. “Key numbers might be how much was sold each day, how much was shipped, how big your backlog is, and how much money was collected.” To make certain that daily reports are user-friendly, Friedman keeps them short. And he knows how numbers should compare with daily target results. “Small fluctuations are only natural, but once you track daily results for a while, you’ll get a feel for those fluctuations that are more troubling,” he notes.
Steer clear of managing the “wrong” critical numbers
Critical numbers are the key financial indicators that determine your company’s success. When they move in the right direction, you know you’re on track toward achieving your objectives. That means that choosing the right critical numbers to track is vital. Try to avoid these potholes that have side-tracked other companies.
- Poor strategic planning.A company aims to increase gross margins. Marketers and salespeople dutifully concentrate on old, high-margin products and neglect newer but lower-margin ones. Result: company grows increasingly dependent on yesterday’s wares.
- Identifying the wrong drivers.We hear the story of the hotel manager who wanted to increase profits by controlling expenses. Trouble was, he wasn’t filling enough rooms to make money no matter how low his operating costs. “His real critical number was his occupancy rate.”
- Relying on bad information.A large service company wants to reduce the unit cost of delivering its service, so it shuts down small, apparently inefficient regional offices and transfers their functions to bigger cities. Only later does it discover the smaller offices were actually the low-cost deliverers.
- The number nobody understands.”One company decided its critical number was economic value added (EVA),” a client recently mentioned. “They weren’t wrong. In fact, that measure reflected a lot of what they needed to do. But no one got it! They went a year and nothing happened.”
- Premature self-congratulations.You do industry comparisons and find that your return on sales is high. No need for critical-number analysis? Look again. Maybe competitors are spending twice as much on R&D as you are. The idea is to identify weaknesses, not just strengths.
Luan van Rhyn is a registered Professional Accountant (SA) and Chief Dreamer and Founder of Calypso Accounting. Luan and his team are passionate about helping SME’s grow and streamline their businesses and are continuously looking for ways to help improve their clients’ bottom line.