By Bryan Orr
I’ll admit it: I’m intimidated by numbers. They have this tendency to kill my dreams and put handcuffs on my plans; or at least that is how it sometimes feels. What I have learned is that my fear of numbers is actually a fear of the truth. It’s much easier to feel good about my business when I am blissfully ignorant of how it is actually doing, and if the numbers aren’t doing particularly well, it’s like a cold bucket of water thrown on my delusion.
In the past year we have implemented some changes in the way that we track our numbers that have made a big difference in understanding the key components of our business. Here is an overview of the numbers we focus on.
1. Profit and Loss
We have started looking at our Profit and Loss Statement on a monthly basis, and it helps us keep our finger on the pulse of our gross revenue as well as our expenses. I thought it would be scary, but in reality it is very liberating to know exactly where we stand each month.
I primarily look at the different categories of expenses and make sure everything looks correct. Areas that look abnormally high or abnormally low are both signs that something could be wrong or could be getting mis-categorized.
2. Segment Analysis
Breaking your business down into its separate segments and tracking the revenue and expense by segment has been an eye opener for us. We have located areas where we were more profitable than we thought we were, as well as areas where we are less profitable than we had figured. This data can help us adjust pricing and shift resources and marketing to the more profitable segments.
3. Profit Per Hour
Often in business we tend to look at Profit and Loss as a percentage. In most cases this does not really tell the whole story; the more important question would be: “Is money being earned appropriately for the work performed?”
To get a better handle on your true profitability, take your total net profit for the month, quarter, or year and divide it by the total number of billable (productive) hours worked among all employees in that same time period. On average a $25 – $50 profit per hour # is appropriate for my kind of service business.
4. Overhead Per Hour
To better understand pricing and expenses it is very helpful to understand your average total expenses per labor hour. Take all of your indirect expenses and divide them by the total # of billable hours over the same time period. This would be any costs that are not directly associated with the product sold or work performed.
This data is especially useful in service based businesses where the customer is being charged hourly. Knowing the true cost of labor + overhead per hour will give you the exact, break even number.
5. Employee Efficiency
You can also now track employee revenues against billable hours to come up with the actual employee revenue per hour. This allows you to compare employees in the same department with one another and really get a good view of who is producing and who isn’t.
While knowing your numbers is not a replacement for actually improving your business, it can certainly help you intelligently reduce wasted energy. It can give you the tools you need to find core business areas where you need to change your approach, and maybe also highlight peripheral areas that you just need to back out of. The effort that you spend developing and refining your business metrics will serve you and your employees in ways that you only find out as you go along.