There are hundreds of metrics you can look at in your shop from day to day, and many can be excellent indicators of the success or failure of your business. You are in business to make a profit so that should be the number one thing measured-otherwise it’s just a hobby. Not that being happy and content with the enjoyment of your craft is a bad thing, but as a business, you must eventually turn a profit. Then, you can look at other financial core metrics like cash flow, accounts payable, accounts receivable, direct costs, operating margin, and cash burn rate.
Personally, I go beyond the big picture profit numbers and use metrics to keep my company focused as a customer-centric business. To measure this, I use a metric I call the “core partner comparison.” I take the gross profit of the top 20 percent of our customer base, which includes the customers we love to do business with and the ones that mean the most to our business.
For easy math, let’s say the gross profit number is 50 percent. Then, we take that figure and compare the remaining 80 percent of our customers to it. Those that fall below the 50 percent mark will get a price increase, and we let them self terminate if they don’t like the new costs. Then, go back to the bottom 80 percent of customers that are the same or higher. We have to figure out why they don’t fall in the core partner group. Maybe they don’t order enough so now we have a select group of customers who we need to work more. They might be hard to deal with even though you make good money with them. Again, you have to determine if they are worth your time, as happiness counts. The customers that drag you down will make it harder for you to do the right things with your core partners. I like to review this metric regularly to make sure we are working with the right people.
When it comes down to it, there are hundreds of different metrics that you can and even should be measuring depending on what matters to your company given its life stage. The critical thing here is to set a time that you will continuously review those metrics. These are not numbers to put on paper to show off or give your accountant something to do. These numbers are used as guides for corrections or changes for your business to stay healthy and profitable. It’s kind of like stepping on the scale every morning. It’s good to do it, but what are you doing about the number if it doesn’t represent what you want or need to be healthy?
—MontCo Consulting
