Congratulations if you've
read past the title because it might seem a contradiction. Of course you
measure in dollars - it's called bookkeeping. But how far does that get
you?
Raw data
As well as being a legal
requirement you can't plan and manage your business if you can't see or measure
what is happening. It is essential that the data is being recorded consistently
and accurately and in enough detail for you to be able to use it - but not so
much so that it becomes a chore and is not useful for anything! Many small
businesses use the data to populate their tax return...and leave it at
that.
Accounts
A step up in
terms of managing your business
is to prepare accounts, whether on an annual or more regular basis. Comparison against prior year figures makes the exercise more meaningful and you can start to draw
some conclusions. However doing that often raises more questions than it answers. For instance you can see your
sales have increased in a particular category (as you
have recorded
sufficient detail) - this is great but is it due to increased productivity, more or better marketing, better inventory management or something else?
And how has this affected your cash
flow, eg higher sales can translate to less cash if you had to offer longer payment terms.
Timely
So producing accounts has
given you some more information, but this is historic and may have little
relevance to current or future business
decisions. Ok, all measurement will be historic but by producing it regularly and timely, accounting data will become
much more useful. Carrying out regular forecasts is also invaluable - these will usually be based on current, up-to-date business data taking into account known or expected changes to your market or business model. Measuring your current data against a previous forecast will also help you draw conclusions, both about current performance
and efficiency.....and your forecasting assumptions and techniques.
Analysis
Businesses exist to
produce profit, but the key to good management is how that profit is produced. You are selling goods or services and the efficient ability of the business to do that is what determines the profit.
Therefore it makes sense to measure in terms of those good or services. Each
business is of course very different but objective analysis vastly improves the
relevance and applicability of your management information. What I mean by this
is analysis by:
• Product that could be per litre, carton, case, room
or whatever unit is most applicable (just don't overcomplicate it!)
• Services are a bit harder but can still be done e.g.
billable hours, hours paid, staff numbers, floor space or whatever is most
appropriate for you
• Combinations such as measuring sales by unit but
perhaps overheads by week if they are relatively fixed in nature
By just adding this extra
layer into your analysis your accounting data becomes much more valuable.
Instantly you can see if an increase in sales revenue over budget or last year
is due to item price or volume or a combination thereof. You could measure by
unit by market to give even more useful information and so on.
Once you have all this
valuable analysis you can start to draw meaningful conclusions and make any
changes necessary. Of course you need to be aware of paralysis by analysis so
only be as specific or detailed as is practical, either to draw conclusions,
take action or to measure and record data in the first place.
