You’re proud a bunch of people actually thought it worth while to give you money for the product or service you sell.
It’s the number you can reach out and touch to make you feel like all your hard work yielded real results.
That sweet, sweet validation reinforces everything you did so you keep it up going forward.
And that’s exactly the problem.
Think about it. When you ask anyone about how their business is performing, whether a new startup or a fortune 500 company, one of the first numbers you’ll get is the sales number.
And you should ignore it if the health of the business is what you’re really trying to assess.
Sales represent customer demand and are a poor indicator of business health
So I was watching Shark Tank again yesterday (I told you this was my new obsession) and like they normally do, they showed some updates from previous Shark Tank entrants. Every testimonial went something along the lines of “Before Shark Tank, I had $150,000 in sales. Now I have over $2 million in sales!”
Maybe it just sounds sexier for tv soundbites because who wants to talk about managing costs?
Maybe the producers on the show ask them to talk about sales in the short follow-ups to keep things relatively simple for the casual viewer.
Or maybe the entrepreneurs are experiencing the “high” of customer interest I described earlier, just amplified by the spike in volume driven by appearing on a nationally televised show to advertise their product.
I get all of that. After all, the network is in the business of driving ratings to attract advertisers. You, however, need to consider some alternatives when it comes to running your business.
3 performance metrics that will give you better insight into business health than sales
Did you know you can have a business with a ton of sales that still makes no money? I’ve had clients discontinue products that customers continued to buy, but they weren’t worth the effort. How did they come to that conclusion?
1. Gross Margin
Gross margin represents the profit you make on producing a product before factoring in any overhead costs. What that means is you can have a truckload of sales of a product you charge $100 for, but guess what happens if it costs you $150 to make it. Your business won’t last too long.
Maybe you fix the problem by charging more for the product if the market will pay for it, or maybe you have to do something to get your costs down. Either way, you wouldn’t know you need to make a change just by looking at the sales coming in.
2. Operating Profit
Operating profit equals gross margin less any overhead costs. Overhead costs include things such as advertising and salaries of people who don’t actually build the product, for example. Looking at this metric may give you a clue to if your org structure is carrying a little extra weight.
3. Cash flow
Of all the metrics, this is my favorite. The best way to describe it is which way did your bank account move when everything was all said and done. If it went up, that’s good. And if it went down, that’s bad.
So why do these self-made billionaires on Shark Tank ALWAYS ask about sales first?
Well, they have a bit of a god complex. Ok, that’s a bit of an overstatement, but the fact is these sharks believe (enough to put up their own money) they can nurse almost any startup back to health so long as the business idea is smart and a proven customer demand exists. The future benefit of customer growth potential dwarfs the long-term benefit you can achieve by continuously cutting costs.
Even so, I’d be willing to risk my own money betting the sharks get into the above three business health metrics as soon as the cameras go off and it’s time to start making real decisions.