One of the biggest problems that business owners face is how to handle the barrage of information that is fed to them on an almost non-stop basis. It is simply not possible to keep track of all the detailed information that’s available and to use it to control operating results effectively.
One solution to this problem is delegating, but most business owners find that delegating doesn’t really reduce their need to monitor key operating data. Often, delegating does not save time either, because delegated monitoring responsibilities still have to be reviewed.
The answer is to install an internal monitoring system that lets you compare a limited set of key current operating figures with your projections. This system has two major features. First, it focuses on where your business is now compared to where you wanted it to be. This keeps you from getting bogged down in time-consuming reviews of last month’s or last year’s figures.
The second feature of the system is that you are not constantly inundated with data. Critical information is supplied to you on a regular schedule. This limits your monitoring responsibilities to tracking only the data that you need to control your business now. Since most of the major indicators are usually reviewed weekly or monthly, the system ultimately saves a great deal of time.
Here are the seven major areas that most business owners should monitor:
1. Sales. Check total year-to-date sales against projected sales every day. Look at sales from major product or service categories once a week. At the end of each month, check sales to your top ten customers.
2. Gross profit to net sales ratio. It is essential to examine costs on a regular basis. A good way to see how your business is performing is to track gross profit ratios – the difference between selling prices and what it costs to produce your goods expressed as a percentage of their selling price. Once a week, check gross profit ratios for total sales, for selected major product categories, and for a few important individual products. It’s not necessary to monitor cost details or look for problems unless gross profit ratios are worse that projected.
3. Cash flow. It’s vital to monitor cash flow. Even a profitable company can find itself in real trouble if it doesn’t generate enough cash to pay its bills. Borrowing becomes difficult because banks don’t like to extend a line of credit if a business doesn’t have enough cash to run smoothly. Check your company’s cash flow against projections every month.
4. Accounts receivable. It’s tempting to extend extra credit to build sales, or to assume that certain customers are good credit risks and will eventually pay. Set up a simple accounts receivable schedule for a careful review each month. Make sure that the total of current receivables increase in proportion to overdue receivables and that your average days outstanding stay relatively constant.
5. Inventory. Monitor inventory levels and inventory components monthly. Check these figures against estimates of how much inventory will be needed to support projected sales. Keep in mind factors such as how quickly inventory can be replenished and whether costs are going up or down.
6. Operating expenses. These command a monthly review. Larger discretionary expense items such as advertising should be looked at carefully. One useful figure to keep track of is how much gross profit the business has to earn for every advertising dollar that is spent.
7. Net income. Net income is always the most interesting and important figure to look at, but it only needs to be checked once a month since you will have a good idea of whether it is going to meet your projections from the other information you are monitoring.
If the seven major monitoring categories do not indicate any significant deviations from projections, there is no need to dig deeper. By limiting yourself to keeping daily, weekly, and monthly checks such as those recommended here, you’ll not only be able to control your business effectively, but you’ll also find you have more time to spend on developing strategies for future growth.