I read an interesting article in the FT this week; it reported that ‘digital innovation is expanding the productive capacity of our economic system in unexpected ways’. Apparently economists and statisticians are struggling to keep up with the pace of change in the digital world.
The FT said “Our statistical systems were developed for a 20th-century industrial world, where goods and services had tangible prices and consistent qualities. They can count goods and services well. But statisticians struggle to measure the impact of rapid product quality changes, such as when a [smartphone] phone suddenly offers dramatically more services than a similarly priced one a year ago. The current statistical systems also fail to capture non-monetary transactions such as [those] that take place when consumers download “free” apps and use “free” cyber services in exchange for giving their data to technology companies for “free”.
This characteristic is also apparent amongst entrepreneurial business owners.
The past 10 years has seen an upsurge in the information available to business owners to measure their business performance. From Google Analytics to cloud accounting you now have more data than ever before and in real time. No more waiting for three months after your year-end for your accountant to produce out of date useless information (although why some businesses still do this defeats me!).
But there is a downside to this explosion in the information available to businesses owners. Too much information can be bewildering and confusing.
Which is why, just like the statisticians trying to make sense of digital data, you need to work out exactly what metrics you need to know and what they are telling you to run and improve your business performance.
Whilst sales and profit on a monthly basis will continue to grab the headlines, they provide little actionable information and on their own may even be misleading. Whilst every business is different, there are some metrics which I recommend should be measured each month and used to plot trends. Here is my list:
- Your ‘true’ profit – not the often misleading figure in your accounts (after your accountants manipulations) but the true amount of profit you made last month.
- Your operating cash flow – if you only measure one number this should be it. The amount of cash you generated from operations. If it’s negative (which it is likely to be if you are growing) do you know what this is telling you and what to do about it?
- Your cash conversions cycle – how long it takes after you spend a £ to get that pound back from a customer. Best sit down before you measure this one!
- Your working capital requirement – the amount you need to invest in stock and debtors just to stand still.
- Your core capital requirement – most small businesses are under-capitalised. How much should you invest in your business to fund its growth?
Are you getting all these in your business each month? Do you have an annual budget and cash flow forecast to measure them against? If not the chances are your competitors do – could this be why you’re struggling?
Advances in technology bring great gains…..but only if we can keep up.