Most people think financial analysis means gathering all of the data about how every single penny is earned and spent in their business. For many of us, that feels like a very tedious and lengthy task.
The experience I really want you to associate with financial analysis and planning, with really getting your metrics right and regularly looking at the numbers, is freedom – freedom from your own biases, which are getting in the way of you making money.
What I’ve noticed is the more present you are to what your business is doing now, the easier it is to create a plan and have clarity about the direction you need to go in order to reach your goals.
The Right Metrics Help You Make Better Decisions
One of the first things to do when beginning your financial analysis is to take all of the financial data you might have for your business and only pick somewhere between 1-3 metrics you use to evaluate the health of your business.
Your metrics should be objective and measurable, which means they’re quantifiable in some way in the physical world. A metric could be something like number of hours spent working and number of hours doing activities outside of business, for instance.
Revenue is a common metric. If your goal is to double or triple your business, then knowing your revenue is an important to keep track of so you know where you are along your path.
If you want to widen your reach, you might choose a metric of the number of people added to your list every month or every week.
If you’re looking to maximize the amount of dollars you have from each customer such that your cost of sales is very low, you might look at, for instance, the length of time people stay with you as a customer or the rate of returning customers.
Notice each of these metrics indicates a very different main goal that leads to slightly different set of actions, which allow you to make better decisions about your business.
It is important to be present to the numbers in your business so you know you’re playing a winnable game.
For example, I was coaching a woman who was trying to increase her client base. We looked at the amount of money she wanted to generate for herself each month, her hourly rate, and the number of hours possible for her to work.
In running her numbers, we realized very quickly there was no way for her to play that game and win it in the way that she wanted. It would be very difficult for her to have a sustainable business.
Do your numbers allow you to play a winnable game?
If you do well in your business, given your current structures, your current goals, your customer metrics, will you get there, or do you need to have completely different thinking?
Part of the purpose of financial planning and analysis is looking back at your business model and seeing if those numbers all make sense.
Financial planning is not about getting 100% of every penny analyzed.
It’s really about applying this financial analysis and realizing it may not be important that you know exactly what portion of your health care insurance cost you allocate to each product in your product sweep.
It’s realizing that it is important to know things like:
Does each product or service make money on its own?
Roughly what percent of your effort is required for each?
Roughly what percent of your income is required for each?
What is your maximum capacity and are you playing a winnable game?
These are the kinds of important questions to consider and use only 1-3 metrics to let you plan for what you do in the next 30, 60, 90 days, and in the next year.
I encourage you to take a moment to reflect on the metrics that you want to track regularly and find a way to make those public so that you, your team, and the people that you work with all see them every day.
It will make a huge difference in how you make decisions and take action in your business.
Image Credit: Gabrieal by Android Jones
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