If you want your business to thrive, look for ways to continuously improve it. Here’s how the information contained in your own financial reports can help you.
Previous articles in this series have discussed the importance of running and understanding your profit and loss (P&L) and balance sheet financial reports, and of comparing these to a yardstick (for example a budget or a benchmark).
To get optimal value from this process, you’ll also need to understand what’s working, and keep doing it or improve; and understand what’s not working, and fix it.
Simply repeating what hasn’t worked in the past and hoping for a different outcome isn’t a sensible option.
A simple way to approach this is to use a model called the Deming cycle to help drive ongoing improvement through a series of steps summed up as Plan, Do, Check, Act. (Note that the word “cycle” is key here, because as soon as you finish one round of activity you start the next, with the goal of creating better and better results over time).
The first step is to formulate a business plan using terms you can use to measure the performance of your business over time. The most common way of doing this is to create a budget for your business that incorporates all your planned operational activities.
For example, if you’re generating lots of leads but taking too long to issue quotes, add a solution to this in your plan (whether that’s a software solution, hiring a person to fulfil this role or whatever), and include that expense in your budget alongside a target to aim for. In the example above that might be to halve the turnaround time it takes for quotes to be issued after a lead is received.
Next, follow through with the decision you made and implement the actions in your plan by hiring the new person, implementing the new software or whatever else you decided on.
For example, if you’ve managed to reduce the time you take to issue quotes from five days to one, how has it affected your sales? (Keep in mind that this is never an exact science, and there’ll be lots of different factors all at play at the same time).
Identify corrective actions that will improve your performance, and incorporate them into your plans for the future.
In other words, if the actions you took to speed up quoting worked, keep doing it (and try to improve it further), but if not, determine why, and consider other things you could try instead, or as well.
Sometimes you’ll discover that your plan worked, but in doing so has created a new problem. For example, your quoting process might now be so efficient that you’ve got more sales than you can comfortably handle!
That requires a new plan – perhaps another new person in an operational role or an enhanced job management process. In either case this takes you back to the beginning of the cycle.
A tiny minority of small businesses thrive and prosper without any planning or business analysis. For the rest of us, the Plan / Do / Check / Act cycle is a simple but invaluable way to continuously improve business performance – especially when used in conjunction with the data in your financial reports.
Do you strive for continuous improvement in your business too? Please share your story in the comments.