Know your Metrics, Know your Business
How well do you know your key metrics? I mean really know them? Do you know your customer acquisition cost, your per unit margin, and if your oldest customer is actually profitable? Going deeper, if you’re a manufacturing company, how are you tracking your efficiencies or production capabilities? If you’re a software company, how are you tracking your churn or conversion rates?
Seeing your revenue grow is always a great feeling but the true measure how well your business performs is the bottom line of your P&L. Having a solid understanding of your metrics isn’t just about talking finance. It’s the dashboard into the health of your business and it’s not always evident from your financial statements alone.
Let me give you greatly simplified real-life example:
You are a manufacturing company that makes a variety of widgets on a common manufacturing line. Overall you are a profitable business but you’ve never looked at the profitability of your individual SKUs. Let’s look at one SKUs, Product Y.
At a high level you think you’re making almost 7% net margin on this product line. However, let’s say the machine setup and switch over for this product is very complicated and takes a lot of time. So much time in fact that you could have run enough units of an alternate product line to make $15,000 in net margin in the same time. Factoring in the lost margin opportunity, here’s the real impact to your business.
The answers to what to do next aren’t always simple. What if this is a key product for your most strategic customer? However, understanding the situation enables you to act.
Using information to act is making an informed decision. Acting without knowledge is guessing.
Understanding how your business operates is the key to finding these type of hidden costs I refer to as “leakage.” It flourishes in environments where you’re not looking at the broader scope of your business.
The right metrics can help you identify leakage and prevent it from spreading.
Now, this type of approach doesn’t work with a startup or a new venture within a company. However, thinking in these terms allows you to figure out your path to profitability. If you can speak with knowledge your investors and stakeholders will have increased confidence in your plan.