“We monitor a set of Key Performance Indicators and use these to help make decisions. “

The language of business is numbers. Business owners must have a firm grasp of their numbers, they must be able to read, interpret and explain financial statements, and they must know how the various statements relate to each other.

If you don’t have this level of understanding, I strongly recommend you sign up for an introductory accounting class at your local community college. You don’t have to be in pursuit of a degree. In fact, most schools will let you “audit” their classes, meaning you’re taking it for self-enrichment and not for a real grade. If that isn’t available, consider an adult education or continuing education class on accounting. However, you gain information, so do it!

Monitoring financial indicators like revenue, gross profit, net profit, assets, liabilities and cash flow is a good start. But each business has its unique set of Key Performance Indicators that should also be monitored. Some are financial, and some are not.

Like keeping score in sports or using the cockpit gauges of an aircraft, you should continuously monitor what’s going on while it’s happening.

#1 KPI to be monitored is…Cash, the King but Cash Flow is the Queen; and we all know who runs the show.

We’re going to talk about all kinds of business measures in this chapter, but I’m asking you to keep this one bit of advice in mind at all times:

DON’T RUN OUT OF CASH!

Running a business is like a game of monopoly. Once cash is gone, the game is over. Similar in your business, if you run out of money, we also run out of options, choices and opportunities. And business is as worth as its best options.  All other measures pale in comparison.

When analysing KPIs, it is critical to understand the meaning of the Raw data and get quality information for decision-making.

Let’s pause here to make a distinction between data and information. Data consists of raw numbers. By themselves, they are of some use but don’t tell you everything you need to know. Information goes beyond the data. It might include a ratio, might indicate whether the data is on an upward or downward trend, and could include the story behind the numbers. Information is data in context. Make every effort to get usable business information and not just data.

What key performance indicators (KPI) to monitor?

You drive your car looking through the windshield a lot more than you look in the rearview mirror. Most small businesses are managed by looking in the rearview mirror almost exclusively. I’m talking about your financial statements, which give rear-looking information.

Don’t get me wrong; your financials are essential. Vitally important. They show you whether you made a profit, how much cash you have on hand and dozens of other measures of business performance.

But as useful and essential as they are, financials don’t do an excellent job of predicting future results. OK, they can play a role in business forecasting. If your revenue last January was $250,000 and sales are up about 3% every month since then, you may be safely projecting a 3% increase for next January.

But what if changes are in the picture … employee turnover, lost significant customers, or an increase or reduction in your marketing activities? As you make decisions and create budgets, it would be nice to have information that helps you make predictions. That’s where forward-looking measures come into play. These are merely financial and non-financial indicators of future results.

Examples of forward-looking indicators:

• If employee turnover is up, you can expect it to impact the business negatively.

• If customer satisfaction is up, you can expect it to impact the business positively.

• If your company has made a significant investment in training, you should expect a productivity improvement.

• A larger-than-usual marketing effort should bring in new sales.

This is not a precise science. You can’t equate a 10% increase in your marketing budget to a 10% increase in sales. Nor can you predict a particular productivity increase from a training investment. Even so, a solid argument can be made for monitoring forward-looking indicators. Most of the strategic planning work you’ll do is based on predictions and projections. These are educated guesses of future results. Why not throw all available information into the mix and make some educated guesses?