SmallBizLady: Why should a small business owner care about data?
Chris Myers: That’s the big question, isn’t it? Our mantra is that if you can’t measure it, you can’t manage it. Unlocking the insights hidden in your company’s data can completely revolutionize the way you run your business and dramatically increase your profitability. With a data-based management approach, you’re now able to make decisions with confidence because you have real-world evidence and support to fall back on.
SmallBizLady: What insights can be gained from looking at financial data in a small business?
Chris Myers: Too many business owners manage their business from their checking account. We have the privilege of working with small business owners across the country, and it’s always amazing to see how many measure success by simply checking to see if more money came in than went out in a given month. That can be a misleading and highly dangerous approach to running a business.
By taking a closer look at your financial data that’s housed in software like QuickBooks and viewing it through the prism of strategy you’re able to understand how your decisions impact your financials and spot problems in advance. You’ll know exactly how capital intensive your business is, whether you’re aligning to your strategy, and how much value you’re creating in your business.
SmallBizLady: How can I get started measuring my business?
Chris Myers: Get started with a simple, three-step approach.
Step 1: Evaluate the competitive landscape
Step 2: Define your strategy
Step 3: Monitor your performance
The first thing you need to do is step back and honestly evaluate your competitive landscape. This goes beyond simply checking in on your competitors. You need to understand the underlying trends that are going on in your industry, how it’s evolving, and what your competitors are doing to respond. Only by having a clear understanding of what’s going on around you can you form the right strategy to address the challenges of the future and use data effectively.
The second thing you need to do is develop a formal strategy for your business. Strategy is not just for big companies…Everyone should know what their key strategic objective is and how it flows through all of the major areas of your business. This makes the process simple, clear, and intuitive.
Finally, you have to monitor your performance against your strategic goals using the data available in your business. It’s a pretty simple concept actually. You have to define a goal in order to measure it, and you have to measure it in order to manage it.
Once you get started with these simple steps, the powerful data-driven management approach used by big companies simply becomes part of your daily operations.
SmallBizLady: How should a small business owner collect the data?
Chris Myers: The best way to collect financial data is to capture all of your transactions in an accounting system like QuickBooks every week. Too many businesses wait until the end of the month to book their transactions. This robs you of the ability to react to problems in real-time. Keeping your data stored and organized in QuickBooks will save you time, headaches, and money when it comes to creating a report for your bank, analyzing your performance, or paying your taxes.
My suggestion for companies that don’t use QuickBooks is to open up a free Google Docs account and track the performance of your key strategic metrics with your team on a weekly basis. It doesn’t have to be complicated…You simply want to know if your performance at any point in time is strong, average, or in need of improvement. The trick with any option is to be diligent about collecting the information!
SmallBizLady: Let’s talk about evaluating your competition, what should I look at?
Chris Myers: The most important thing when evaluating your competition is to make sure you’re comparing apples to apples. We suggest using Risk Management Association data to compare your performance to your competition. It’s best to compare financials on a common-size basis, which simply looks at income and expenses as a proportion of total revenue.
When actually looking at the numbers, focus on how your gross, operating, and net profit margins compare to your competitors. This will let you know whether or not you’re controlling your expenses appropriately for your industry. Also, it’s important to check out some of the key financial ratios, such as Accounts Receivable Turnover to see if you’re doing a good job things like collecting payments from customers.
SmallBizLady: What tools or resources are available to help get a handle on the competition?
Chris Myers: Being able to track and understand how your competition is doing is one of the most important things a small business owner can do to stay on top. The first thing I would suggest doing is to try and connect with national associations in your industry. This is going to help you understand the big picture when it comes to the average performance of similar businesses. Next, I’d suggest looking for data from the Risk Management Association. It’s a bit too expensive to simply go out and buy for your business, but key partners, such as banks and credit unions, might be able to provide the data you’re looking for. Finally, you can use a number of online solutions to help you compare, including Intuit’s industry comparison tool and BodeTree.
SmallBizLady: How often should a small business adjust their business strategy?
Chris Myers: Small businesses should track their strategy monthly and refresh it annually. Strategy isn’t something that’s written in stone and then set on a shelf to collect dust. It’s the living, breathing framework of your business. The major areas outlined in your strategy map should be tracked and evaluated monthly by looking at the performance metrics associated with it. Your strategy helps you ask the right questions and identify the right data metrics to focus on.
Of course, if something significant changes in your industry, such as new government regulation or the entrance of new major competitors, you should drop what you’re doing and update your strategy. You can’t sit on the sidelines while your industry changes around you!
SmallBizLady: What’s the easiest way to use data in a small business?
Chris Myers: If you can only track one data point in your business, it would be the value of your company. Your valuation is the only data point that takes into account where you’ve been, where you are, and where you’re going. It also takes into account everything that’s going on outside of your business, from how much competitors are selling for to the rate of return that’s appropriate for your company.
SmallBizLady: Ok…Let’s get down to the bottom line. How does this help you make money?
Chris Myers: I’m so glad you asked! As I mentioned a moment ago, understanding your data and strategy will help you to make the right decisions in your business. You’ll be able to fine tune the way you run your company and find new ways to optimize the value of your business. You’ll know where to invest and spend your time to help you generate more sales, focus on controlling the right expenses, and getting paid faster!
SmallBizLady: What are the best tools for monitoring the financial performance in a small business?
Chris Myers: I don’t think there’s necessarily one single tool that is best. Quite a bit depends on how large your business is, how long you’ve been in business, and how much you enjoy working with numbers. My favorite tool for smaller businesses that don’t use QuickBooks is called Indinero. It automatically syncs with your bank account to help your track your finances in real time.
Additionally, there are a number of apps out there that can provide dashboards that help you manage your numbers. Solutions such as 60Mo, Corelytics, and ZenCash can all be helpful. We might be a bit biased, but we think our product BodeTree is the easiest way to track, understand, and act on all of the data that’s hidden deep inside your business. We designed it for people who don’t really like digging into numbers.
SmallBizLady: Is this a one-size-fits all method? How can it be tailored for different small businesses?
Chris Myers: The fact of the matter is that no one knows your business as well as you do. It’s your job to use these tips and tools to get the most out of your understanding of your industry. The framework we just outlined provides the discipline and thorough process you should use to get the most out of your knowledge. Remember to always be a critical thinker and don’t be afraid to ask the big questions!
SmallBizLady: Do you have to be a data geek who understands statistics to take this on?
Chris Myers: Not at all! I think there’s a lot of fear out there when it comes to using data to analyze your finances and develop your strategy. That’s really unfortunate, because it’s truly vital to the long-term success of your business. The most important thing is to be organized and develop a carefully crafted strategy to help you use data effectively in your business.
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