What’s Your Critical Number?

4 03 2010

Your critical number. The number that is the one ratio where your business is weakest relative to your competition. As a small business, you’re sure to size up your own business against competitors in your market – why not take it one step further?

This New York Times article got me thinking about how businesses prepare for the best. Preparation also concerns knowing where your business is at its weakest; a standard question to answer when writing a business plan. Business plans are a great outlook on success, but they should identify areas of risk as well. And they’re also a great reference point at any stage of your business, whether your just starting or are seasoned with years of experience.

Now to defining your critical number. Business owners often have a tendency to rely heavily on their accountants when it comes to tracking their company’s critical numbers. But, as a business owner, the financial health of your business is your responsibility only. You don’t need a graduate degree or an in-depth understanding of double-entry accounting to know which numbers are the most critical to the health of your business, but you do need to be financially literate. With regard to defining and tracking your critical numbers, consider the following:

  • Start with the basics – your balance sheet, income statement, and cash-flow statement.
  • Focus on key profitability terms – gross margin, net income, and EBITDA.
  • Learn your key ratios to create a number dashboard as a reference – sales/revenues, net profit, defensive numbers, quick ratio, total inventory, and debt to equity.
  • Think about other critical numbers personal to your business or industry – see this list and this list for ideas.

With your critical numbers at hand, the next challenge is to get your employees to think like owners. Employee engagement is one of the best distinguishing success factors separating organizations that are thriving from those just barely surviving. Make it fun; consider developing a bonus program, profit sharing or variable compensation plan.  This can be beneficial for two reasons:

  1. Tying bonuses or profit-sharing to your critical number creates an insurance policy for your business that makes certain that everyone involved focuses on your business’ biggest weakness.
  2. These plans become an educational tool to teach each and every employee how he or she can make a contribution toward improving your critical number and enhancing the strength of your business.

And if you’re uncertain of how to obtain the critical numbers of your competition, become resourceful. If your competition includes public companies, this information may be found online. Dunn & Bradstreet (a global commercial database containing millions of business records) could also be a useful resource. You might also check with your banker; bank credit departments often have access to lots of data these days.

As the NYT article promoted, your critical number, whatever it is, will soon become the hub of your business activity; your business operations are connected to it in different ways and it affects your business’ long-term performance. The sooner you determine your critical number, the sooner you’ll be able to hit related performance goals – and the faster you’ll succeed over your competition. That’s certainly critical.

Photo courtesy of BiggerProfits.com.

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