Before heading down the road, it’s imperative that we make sure our vehicle is up for the trip. We look at our gas gauge, our tire pressure, and when our next maintenance service is scheduled. We often get much of this information from our dashboard. The same is true for your business.
As you make important decisions for your business, you want to have a good handle on your business financial dashboard. There are a couple of places where you can access this information. First, up-to-date financial statements can give you important data and trends regarding your income, expenses, and the balances of your cash accounts and loans or credit cards.
Second, your KPI’s, or Key Performance Indicators, are a great source of data. KPI’s may include financial information, but may also be more operations or marketing related, such as number of website visits vs. conversions or employee worker’s compensation claims filed. Since financial statements and KPI’s will help you start your journey with confidence, let’s dive into each one to understand how they can be used.
Financial Statements
The best way to prepare for the future is to understand where you are right now. Financial Statements, so long as they are up to date and accurate, will give you a good indication of your current financial status. The Profit and Loss reports give you the ability to track your current monthly data against historical trends. One month of data is interesting, but the true value in your financials are in the trend analysis.
How does the current month compare with last month, with the average of all months this year, or with this month last year? With the example of revenue, if it is significantly lower, what is causing that variance? What can we do to improve it? If it is significantly higher, what is driving the improvement? and how can we keep it up? Or is it a one-time boost that will not continue past a few months? By understanding this scenario, we can make better decisions.
If revenue is going to continue at a higher level because there is a different buying habit with our customer base, we need to prepare by ordering more product, engaging more labor for packing and
shipping, etc. If it’s temporary, then perhaps temp labor or contracting out the pack and ship functions may make more sense. Without the data analysis, you may be scratching your head wondering why your current crew can’t keep up and wondering why you are paying overtime each pay period.
KPI’s
While financial information is important, it isn’t the only data that is useful for your business. Just as you can use financial statements to understand trends, there are other key performance indicators that lend themselves to trend analysis. Sales data, for example, how many website visitors, how long do they stay on the site or how do they move to the site, how many abandoned shopping carts, the effectiveness of ad conversions, are just a few you might use.
KPI’s have the advantage of being able to be leading indicators, not just historical. For example, I know based on website visits each month, how that translates into completed web forms and how many contracts will be sent and ultimately signed. So long as our system operates consistently, I can plan my staffing resources accordingly.
In this example, website visits are a leading indicator. It is a historical number, but it points to a future revenue number. What data are you tracking that is a leading indicator for your business? I suggest looking at your website traffic and sales data and also your inventory data for leading indicators.
While financial statement and KPI dashboards provide information that is extremely valuable, it is not the only information you need to be an astute business owner. Seth Godin in his blog today, April 10, 2023, said “It’s almost impossible to safely drive a car while only looking in the rear-view mirror. Only seeing where you’ve been is a terrible way to figure out where to go. But it’s really unsafe to go forward with no idea of what came before.”
Using the rear-view mirror and the dashboard of your car are excellent tools but they are not the tools for figuring out where to go or how to get there. Next week we’ll explore another tool for our financial road trip, your GPS navigation system, or Profit First benchmarks.
Profit First is designed to ensure positive cash flow. Until then, make sure you have plenty of gas, I mean Cash, for your trip, because the #1 reason businesses fail is because they run out of cash. Our trip will be much more fun if we all go together and get to our destination.
If you need help with making sure your financial statements and KPI’s are accurate and will tell you what you need to know, reach out to the bookskeep team today and let us take the wheel!
Interested in Profit First?
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!
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