I have seen several businesses now that don’t know themselves via numbers. They may be founded by highly relationship-focused entrepreneurs, which can be a great thing, or they may be focused by people who are not numbers savvy. However, I can’t tell you strongly enough about how important it is to know key metrics for your business and to follow them.
Sometimes, my colleagues and I have seen businesses that, when we finally look at the numbers, appear as dogs walking on their hind legs. That is, these are businesses that currently shouldn’t be doing what they are doing and probably cannot do it for very long. One of the key techniques we focus start up teams on to achieve a sustainable position was discussed in an earlier entry. The business model canvas is one of the techniques we recommend to set up a condition where you can know your business by the numbers and follow it over time to get a sense of where you really are.
The business model canvas can be used to create a pictorial history of the business. The business model canvas can then be considered at different meetings and revised. Then, over time, we obtain a history of the business and can look back on this to gain certain insights. It will focus us on those areas on which our business rests. Next, we need to establish and focus on key metrics for the business. Many new businesses are highly dependent on new customer acquisition. In those cases, we recommend getting metrics together about that key sector. Whatever parts of the canvas are key we recommend putting some metrics in which you can believe attached to that.
However, often there are several areas of the business on which we should focus. One of these is cash-flow. Cash is, in fact, king as the the saying goes. This is because it is highly liquid and very transportable. Cash-flow is incredibly important to businesses and, although I was told that in business school, I didn’t fully appreciate it until situations arose in one of the first businesses I helped co-found.
In short, I learned important lessons like: it is possible to grow the business so much so quickly that the business actually grows its way into bankruptcy. That can be because, although the business is very worthwhile and profitable, it is unable to meet its current obligations owing to cash-flow restrictions. So, for that reason, I can’t stress enough the importance of knowing your businesses’ key metrics and establishing these upfront.
There are multiple sources you can go to in order to discover what key business metrics there are for startups. Some of the key metrics we look at to prevent the dog-on-hind-legs-syndrome (or DOHLS, because, being in healthcare, it seems I have to attach an acronym to everything) are business financial ratios. These can tell you about the current financial health of the business.
Some of the most important ones include the acid test ratio, which focuses on your businesses’ ability to meet its current obligations. The acid test ratio is called that for the very important reason that it is one of the most central, key metrics for how your business is doing. However, these are not the only lenses through which you should view your business.
One of the other important things is the days in accounts receivable. If it is taking you too long to collect on outstanding bills you may need to incentivize customers to pay those bills faster. Taking too long to collect on invoices can directly inhibit your cash flow and ability to meet those current obligations. For a more in depth discussion on financial ratios and associated metrics, including the classic three levers of financial control, I invite you to read a brief primer on financial ratios, either available from Amazon for Kindle or many online sources.
Some of the key ones we use include the acid test ratio and the ROIC (return on invested capital). However, you should recognize that startups need different ratios than established companies. For startups there are other metrics which are no less central to understanding the quality and life of the business. Sometimes when we give talks to surgeons and other physicians about their startups we even use the analogy of the business as the patient and focus on some of the metrics we use as if they are vital signs. This is a useful exercise and my colleagues and I do this routinely at our yearly seminar.
The yearly seminar really helps both physicians, non-physician caregivers and other providers in healthcare get their minds wrapped around how to know how well their business, patient, or business model canvas is performing. There are some other useful metrics that are indigenous to startups. For example it is very key to highlight a customer-specific metric. Some startup books advise that the core team actually focus mostly on customer development at the onset of the business. That means the entrepreneurial team spends a great deal of its time developing the market and focusing on techniques such as evergreening.
Evergreening is a classic technique that focuses on obtaining more or repeat business from a client pool. This evergreening technique references trees and tree growth where the tree is green all year long. This is the focus for techniques collectively called evergreening. Beyond evergreening there are also other useful areas of focus for business metrics of the startup. Some of these include the number of new potential customer contacts and the attrition rate of customers. How much time, effort, and ability does it take to convert a set number of calls to a new customer. Related to this there can be costs associated with customer acquisition. If you ever watched the show ‘Shark Tank’ this is one that you have seen repeatedly question by some of the sharks. If a startup knows its cost of customer acquisition this tells us a great deal about the startup. First, it tells you that the startup is focused on bringing in new business and really has focused on it to the point where they can name a price associated with the cost of acquiring new customer. It shows that they have spent time working on it. And it shows they have thought about the inflow to their company to an appropriate degree.
Regardless of what the specific number is, Mark Cuban’s typical question on Shark Tank indicates that the startup has a good sense of how it brings in new customers and there is a ready-made stream of inflow developed. For startups, again, it is very key to have an understanding of metrics associated with customer acquisition and business acquisition so as to prevent dog walking on hind legs syndrome.
Have you ever seen any business that has this dog walking on hind legs syndrome (DOHLS)? It happens all the time that, when a business finally looks at its numbers, it becomes clear that it can’t continue onward doing what it’s doing for very long just like that wobbly dog.
To share a personal story, I have been very fortunate with at least one of the startups in which I have participated. My cofounder and I were not as focused on our business model’s metrics at the beginning of the startup, and instead took the route of the very personal, very relationship-oriented startup. This had many upsides. However there were a few downsides including the fact that we began to encounter cash-flow problems etc. and quite nearly did grow ourselves into a bankruptcy-type situation where we could not cover our costs. This was because of cash-flow as the company grew. Each time the company grew into a new venue we had to be able to have approximately 20k cash on hand to be able to pay our first independent contractors who worked at that site before that site was required to pay us. This 20k of float, or floating money, was not something we appreciated as well as we could have initially. Fortunately, owing to excellent work on the part of my cofounder and the business team associated with the project the company has gone on to do well. However, we were almost too late when it came to appreciating our financial metrics. We had to pay more attention to our days and accounts receivable etc, and this was something that it took sometime to get a feel for in our business. So there are multiple business metrics on which we can focus for our startup.
Learn from my mistake: regardless of the specific ones you choose to believe in and rely upon it is essential that there be some on which you rely. I recommend some of these include customer-focused metrics so you have a sense of how to develop a continuous, effective, cost-conscious pipeline for new customers into your business model. For more information regarding financial ratios, including those focused on profitability, cash-flow and inventory I direct you towards any of the classic primers on management by financial ratios which you can find on Amazon.com or the Google. Also, remember to look at one that is startup-focused.