The One Metric That Matters
What’s the most important metric you should be measuring to ensure your business health?
Although there are key numbers, like sales and margin, that you should monitor regularly, the most important metric you should be measuring depends on what your business needs the most, at that moment.
In our discussion with distributors through the years, it seems there are two extremes of analyzers: those who analyze everything, who spend their time pouring over every sale and every cost, and then there are those who analyze virtually nothing, never looking at any report on a regular basis to determine how they are doing against their goals.
But a business is in a constant state of flux. What you measure affects your immediate decision making which ultimately shapes your business future. For example, if you are struggling with profit, it may be more important to look closely at margins and profit, by month. Or if sales are declining, focusing on sales monthly even by client, may be essential for a short season. Or, perhaps operating expenses have spiked, and you may need to look at a simplified version of your expenses on a monthly basis just so that you can bring those back in line. The key is to be alert to the most pressing need of the moment so that you can focus your limited time and attention on what matters most.
What other metrics should you be measuring on a regular basis? I asked Catherine Graham, commonsku’s CEO, what numbers she has analyzed the most through her experience running distributor RIGHTSLEEVE. In addition to quarterly and bi-annual reviews, Catherine analyzes monthly sales and margin by rep (for commonsku users, these would be from the Sales Target Report and the Sales Rep Report) and by company, and also by business unit (some distributors have portions of their business that cater to a certain sector or vertical and split these up into business units). Catherine then compares these against their business goals. She closely monitors how much was put into production YTD compared to last year’s YTD (for commonsku users: the Sales Dashboard). Catherine added, “It’s also good to keep an eye on ‘what’s pending client approval,’ those orders that get stuck in the decision making phase." Sometimes, it only takes a quick email reminder to get a project unstuck and off a client’s desk. "When I ran a distributorship, I measured those same essential numbers, monthly sales volume, margin, and profit by rep, and total company sales, margin, and profit, and I reviewed these monthly, quarterly, and bi-annually. Mid-year is also a critical time to do a big-picture analysis on your progress. In this business, if you measured your progress only by monthly sales, your outlook could be easily influenced by one large order, or the lack of a large order."
I asked Rod Brown, Chief Financial Officer for distributor MadeToOrder, about this quarterly review, Rod said, “It’s critical to pay attention to monthly numbers, but quarterly is a much better vision of how you are doing, I try to compare quarter-on-quarter results to make sure we’re trending in the right direction.” I also asked Rod how this regular analysis impacts your business as you grow, and Rod replied that if you are the primary salesperson for your company or you are the company, he suggests you look at “a trailing twelve number,” the previous 12 months of your sales. A “trailing twelve” is exactly what it sounds like, the previous twelve months that trail the current month. For example, as I write this, it’s June 2018. Rod would look at the past twelve months back through June of 2017. Rod suggested that it’s like the dashboard of your car, you have to look at only a few key metrics: sales, profit, and expenses. “Graph the expense line against your top line and your bottom line and ask, ‘Are these moving in a reasonable progression?’”
The key to analyzing your progress is to keep it simple. Some distributors get caught up in the minutiae of irrelevant numbers that have no bearing on the health of the business, often, out of habit. Like Rod’s example of the dashboard of your car, you only need a few core numbers that you can quickly glance at to tell you what you need to know to make decisions. Too much over-analysis causes paralysis (as the saying goes), and if you’re not reviewing your progress at all, you’re operating on blind faith!
Identify your most important metric for your business right now and then, create a short list of the essential numbers you should glance at regularly, once you develop the muscle memory of regular analysis, your review should be quick, informative, and easy.