Financial statements shouldn’t be your first line of defense in identifying business problems.
The core financial statements—income statement, balance sheet, cash flow statement—are required for understanding the performance of your business at a specific point in time or over a period of time. But these statements by themselves aren’t enough to spot potential problems early on. Usually by the the time an underlying business problem affects your financial statements, the damage has been done. Small-business owners need early warning systems to identify and address problems (as well as opportunities) as soon as possible.
This is where business metrics are useful. Metrics track and quantify various aspects of your business’s condition. They don’t always deal with money explicitly; they also cover use of raw materials, efficiency and timing of production, employee-related statistics and more.
You can find many standard metrics for your business in textbooks or on the Web, but if you’re going to go through the effort of tracking different aspects of your business, it’s best to do it right and develop metrics that are appropriate for your business.
When developing metrics, business consultancy Whitestone Partners recommends this framework as a starting point:
- Structure your metrics like a pyramid. The top level should offer a good overview of the performance of the overall business with narrower, more specific metrics available as a drill down in case you need to explore a particular area in greater detail.
- Use the MECE model. That stands for Mutually Exclusive and Collectively Exhaustive. This phrase means that your metrics should not overlap, but, when taken as a whole, cover all areas of your business.
- Ensure accountability. Each metric should be traced to someone at your company. This means if you need to investigate something, there’s a person who has ownership of that metric.
