So how do you know what your business model is? The first thing to do is to make sure that the company’s financials are organized correctly – that overhead is separate from direct costs, that other income and expenses are below net operating income, that expenses are correctly categorized, that the balance sheet accounts reconcile to the asset of liability they represent.
Once the data is organized correctly, the next step is to do industry comparisons – what are the common metrics and benchmarks in your industry and how does your company compare? It is critical that this comparison be “apples to apples”. Also, make sure you understand the 3 or maybe 4 most important metrics for your industry before starting out. There are literally hundreds of metrics that can be computed, but just a handful that give you the information and perspective to manage and guide your company.
The next step is a variance analysis – where is your company similar to and different from the industry benchmarks? The beauty of metrics and variance analysis is that this process allows you to focus on the places that need attention and leave the ones that are working alone. Once you have identified a metric that is out of skew, analyze if it makes your company perform better or worse than the industry benchmarks. Benchmarks are useful, but it’s very good to outperform them! For benchmarks where your company underperforms, the next step is to drill down, to look at the components of that particular metric, and see what aspect is making the benchmark underperform. By following this path of variance analysis, you can get to the root of a problem pretty quickly.
Once you know how your company compares to other similar companies and you understand what aspects of your company require honing, the next step is find your company’s “sweet spot” – the place where everything is working together – where your company just “hums”. And that, my friend, is a beautiful sound!
Bottom line: You need to understand your company’s business model before you can thrive. Remember: first direction, then speed.