When you look at your monthly financials, you get a snapshot insight into how your business did in the previous month. It is helpful to also have the YTD figures on your monthly statement but these are the absolute basics.Obvious changes like inventory, accounts payables and receivables can be spotted right away. Other trends might not be so easy to see but some simple math equations can cure that.Let’s take a look at sales. The Gross Sales number will be on the financials but what is not on there is just how profitable those sales were. Sure, the bottom line is there but it doesn’t tell you much. This is where the math comes on. Rather than just reporting the gross sales figure, work on a ratio that might be more meaningful to your business. For a service business, this could be gross sales divided by payroll. What ratio are you striving for? What ratio is acceptable and what isn’t? Is there a ratio you need to achieve and could you tie a bonus program to this? In manufacturing you can formulate similar meaningful ratios. You might want to have a ratio pertaining to sales vs the cost of carrying inventory.
Having a ratio dividing sales by the inventory carried gives you insight into what is happening in the sales organization as well as the manufacturing side. Are the salespeople selling what you have or is everything a special order? If your ratio is low, you are carrying more inventory than you should in relation to the sales. How can you change this? What ideas can come from within the organization to improve the ratio? Is part of your inventory not moving?You can only change things that you measure. These are two simple examples of how you can use math in your business to measure something important that you want to get a better handle on. Other simple but useful ratios that I often use are operating performance ratios; Sales to Assets (sales / total assets), Return on Assets (pretax profit / total assets) or Inventory Turnover (Cost of Goods Sold / Inventory), just to name a few. These ratios allow you to see trends quickly so you can also take action quickly. Having clear targets and knowing what “best in class” targets are is key.
Every business is slightly different but the way you run a business is always the same. You need to know what is going on in your business and you need to measure what is going on. Only then can you set clear goals and targets that can be measured and benchmarked against. Only then can everyone within the organization have a clear understanding of what it is that you want. Just looking at sales and the bottom line doesn’t do it as it is too vague for most people to feel empowered to impact it.Identifying meaningful measurements for your business will allow you to structure your business in such a way that everyone within the organization is pulling in the same direction. This is the objective. You’re the CEO, it is your job to figure out what ratios are vital. Then communicate those to the entire organization. You will be amazed by what people will come up with to help achieve the goals you set, especially if you tie a bonus program to it!How do you communicate the goals of your organization? Do the people that work for you really know how they can make a difference? Are your goals clear and measurable? If you are in doubt at all, you might want to try using math in your business and develop some meaningful ratios to help steer it. You’ll be amazed at the results.