Article Summary: Because it’s human nature to impact the metrics you pay the most attention to, now is a good time to look at your business’ progress for the first half of the year and evaluate your plans for the second half. In addition to setting goals and strategy in January, I like taking a short pause this time of year to measure progress on goals, make decisions based upon how the business is performing against those goals and looking at the business' overall financial health.
Measuring Business Performance Against Your Goals
I’m convinced regularly reviewing your goals throughout the year is a good idea. For example, when I was a small business owner, I looked at my revenue and how it was tracking to plan daily, weekly, monthly and quarterly. I wanted to know how I was doing compared to the same period last year. Was I gaining or losing ground?
Because some initiatives take time to gain traction, I didn’t make knee-jerk reactions to a week, or even a month, that looked like it might be a little behind, but did consider taking actions if a quarter, or in this case, the first half of the year looked to be struggling.
Four Things to Consider if the First Half of the Year is Lagging
Once you’ve looked at your performance, if you find you haven’t met your goals, here are a few actions you can take to help you get back on track:
- Set specific and measurable goals: After a bad period, it’s important to be specific. “Increase revenue” is not specific enough. A better goal could be, “Create a weekly special to promote via a postcard sent to every customer on Tuesday night so they have it in the mailbox on Wednesday.” Whatever goal you set, keep it specific, keep it measurable, and keep yourself accountable.
- Laser focus on micromanaging expenses: If you’re behind on your revenue goals, in addition to setting goals to ramp up sales and revenue, you should take a good look at your expenses. Make sure they are in line with your revenue. I recognize that there are often “overhead” expenses most businesses have that are not related to generating revenue and profit, but after a bad quarter or a slow first half, make sure you scrutinize any business expense that isn’t related to generating income.
- Focus on incremental improvements: Fortunately, small and incremental actions can yield big results. You may not need to throw out the baby with the bathwater. Tweaking what you’re doing could be what’s needed (you’ll have to be the judge of that after looking at your results). Nevertheless, look for small things you can start doing today, tomorrow, and next week that might improve your results over time. I seldom look for the “silver bullet.” I’m not convinced there is one.
- Be transparent with your employees: Employees aren’t usually the cause of a bad business cycle, but they are impacted by it. Let them know what you’re doing to bounce back. Additionally, involve them in making your plans. I’ve discovered those closest to the work understand it the best. They might have some great ideas to make improvements for the second half.
Four Things to Consider if You’re Ahead on Your Goals
Fortunately, there are times when you find you’re well ahead of plan. Although this is what every business owner works for, it’s not a time to coast. My Grandfather was a farmer. As a boy I once asked him why he was in the fields before daybreak and worked until dark. He replied, “You gotta make hay while the sun shines.”
I now think of it this way: When times are good you’ve got to maximize results. Here are four things to consider if you’re ahead of your plan:
- Keep to your budget and continue to micromanage expenses: You may have guessed that I’m a big fan of keeping expenses under control. A strong business cycle gives you an opportunity to maximize profits. Take advantage of it.
- Invest in the future: Micromanaging expenses doesn’t mean don’t invest in your business. You should always be setting aside a little extra capital to invest in the future. I’m fairly conservative when it comes to borrowing and feel like if it doesn’t promote a greater ROI or increase the value of the business, the costs of borrowing can be too high. That being said, there are some investments in your business that could do both. Whether you decide it makes financial sense to borrow or save to invest in your business, when you’re on a roll is a good time to invest.
- Don’t let ‘hopium’ cloud the realities of the business cycle: Most businesses tend to ebb and flow. Even those that aren’t ‘seasonal’ businesses tend to have an annual cycle. In the middle of a business cycle or when running ahead of forecast, it can be hard to think much about the ‘ebb’ in the cycle that can be right around the corner. Even as your business grows and the business cycle becomes more predictable, don’t fall for the temptation to trust in ‘hopium’ (the unwavering belief that the business would continue on the upward trajectory unabated) encourage you to spend more than you should. The year-over-year numbers should be improving, but unless you’re doing something different to mitigate the slack time, the business cycle will continue to ebb and flow.
- Don’t forget your employees: When running ahead of plan, your employees are likely putting forth extra effort. Make sure you recognize the effort. When I was a business owner, I didn’t have the luxury of being able to throw around a lot of cash at these times, but I was amazed at what a couple of movie passes or a pizza for lunch did for morale. It doesn’t take much, but recognizing the extra effort your employees put forth when the business is busy is a good idea.
Take Time to Evaluate Your Business’ Financial Health
Mid-year is a good time to take a look at your business’ financials (you might also consider meeting with your accountant to get his or her perspective on how things are going financially). I’m not convinced every small business owner needs to have a degree in accounting, but there are a handful of metrics every business owner should be familiar with along with the financial reports that explain those metrics.
Here are the five metrics I would look into at the midpoint of the year:
- Income: Is your income tracking to plan? This is an important number to track every month, but this is a good time of year to see how you’re doing compared to the forecast and strategy you established in January.
- Expense: Confirm that your expenses are in line with your income and according to plan.
- Cash Flow: Poor cash flow has wrung the death knell for far too many businesses over the years. Ideally you should be shooting for twice as many assets as you have liabilities or a 2:1 cash flow ratio. Divide your assets and liabilities to get the ratio. Anything lower than 1:1 or more liabilities than assets should be a red flag that you have a cash flow problem, even if you have cash in your checking account at the end of the month.
- Accounts Receivable Aging: This is an important metric that you can’t afford to ignore. How long does it take your customers to whom you offer credit terms to pay their invoices? If you offer 30-day terms, do they consistently pay in 30 days or do they sometimes go 45 or 60 days?
- Accounts Payable Aging: Another number you should know is the average number of days it takes you to meet your business’ financial obligations. If you’re able to effectively manage your Accounts Receivable, your cash flow, and your income, you should be able to keep your accounts payable current and maybe even take advantage of the prompt payment terms your suppliers likely offer you.
If you have any questions about any of these financial metrics, speak with your accountant or other financial advisor. This is a good time to instigate a regular mid-year meeting with him or her if you don’t do that already.