When founding a startup, it sounds pretty basic to start by identifying a business idea and making that idea profitable. For many small businesses, however, profitability is all well and good in theory, but much more difficult to realize when you get into running the business. Often, as business owners get caught up in the day to day tasks of running their business, keeping track of some of the most basic metrics is given a lower and lower priority. After all, who has time to keep a half dozen spreadsheets up to date, and who has time to actually dig into the numbers to find real answers? If these are issues your business is struggling with, you’ve come to the right place. Throughout this series, I’ll be going over how to measure, track, and draw insights from your business in a way that still leaves you time to manage your day to day tasks. We’re going to start very basic, but don’t move on too quickly – it’s easy to have done some fundamental things right and to have overlooked others, and if you haven’t checked all the boxes, things will only get harder to change later on. So let’s get started.
Opportunity Cost- if you’ve taken a business or economics class before, you probably knew what this was at some point in time and then forgot about it the day after the test. In my broad layman’s terms, opportunity cost refers to the most valuable alternative to an investment. For startups, frequently that “investment” will be your time as the founder, and the time of your employees. If you want to know how to grow your business more given the limited time available, understanding your opportunity cost is critical.
Tracking Inventory and Profit
With a business based on products, tracking your inventory and profitability by item is pretty straightforward – as long as you have the number of items stocked, your cost, selling price, and quantity sold, you’ll be able to get a pretty good picture of how each product is contributing to your overall performance. For service-based companies, however, things get more complicated quickly. Your “inventory” is based on hours, and thus profit is derived from the hourly rates. For businesses that do their pricing based on more than a simple hourly rate, the offerings have to thus be analyzed in terms of the number of hours required (or estimated) to give an accurate picture of the cost to you associated with that product. When everything is broken down into hours, you have a means of comparing rates and profit across products that would be otherwise unrelated. As a practical example, I’ve included a simple table below:
Example hourly cost: $30
|Product||Rate||Est. Hrs.||My Cost
= est. hrs. * your hourly cost
= my cost/rate
|Basic Website Analysis||$400||4||$120||$280||70%|
Everything here is pretty straightforward, but don’t underestimate the power of this simple tool. Replicating this across each of the services you offer can provide valuable insights into which things you need to focus on, and which you need to modify pricing on. In addition, this can be used to calculate the exact profit you will make from each client, and the number of hours of work involved. If you know you’re working on deals that total a number of hours greater than what you have available, you have a problem and need to start hiring and training more people. Using hours like you would an inventory helps your business reap the benefits of data-driven decision making.
Eventually, you can work towards building things like this magnificent beast below that auto calculates pricing based on a couple inputs, and spits out profit by offering, cost per month, total hours, and a host of useful metrics. Complicated? A little. But we’ll get there. For now, knowing what I outlined above is enough to get going. In this case, the calculator spans about a hundred rows.
The above, showing the associated formulas for each cell:
Note that here when I talk about profit, it’s only in regard to the “production cost” of what you’re selling. This doesn’t include a large number of costs to your business, such as rent for a brick-and-mortar location, or pay for support staff, etc. Because those things are relatively constant, however, and are not directly connected to the number of products you sell or clients you have, those are much easier to do the math for later on. I’m going to go ahead and assume that you know how to calculate total profit, but if you need some help or have a special case, feel free to drop me a note.
Managing your employees
For most businesses, employees are the single largest expense you have, and for good reason. Employees can make or break your business, and play a bigger role than any marketing campaign, tool, or theory ever will. Given the amount that you invest in your employees, it’s really important to track this investment however you can. Now I’ll be the first one to say that measuring everything your employees do is a quick way to get them angry if you’re that manager that’s constantly screaming “You spent 15 minutes at the water fountain today, that cost me $5 and I want my money back!!”. On the flip side of that, though, good time tracking can help measure your employees workload and see if they have too much on their plates, find problem areas that are taking way longer than you expected so that you can adjust your pricing accordingly, and in general keeping an eye on the welfare of your employees.
A basic example of time tracking is below, breaking things down by client (or internal), the specific service that it relates to, and time start and stop. The math auto-calculates to keep things simple for the users.
With something like this, you can bring it into a separate tool (in this case I used the fantastic Qlik Sense Desktop (also free) to generate the following:
That can then be broken down by client, service, or team member:
We’ll get into data integration and pulling numbers like this a little later (insider secret – it doesn’t take nearly as much time or math as you would think). I just wanted to take a second to show some of the value that this can have when done consistently.
Don’t have employees? This still applies. Tracking the time you spend is even more important than tracking that of your employees. As you grow your startup, you (and your partners if you have them) will be the driving force behind your success. Being able to identify which tasks are producing the greatest impact, and what low-impact tasks are sucking up your time is a powerful way to increase your productivity. Outsource those time-sucking tasks to another business or a freelancer. Find a way to grow the high-impact tasks so that you can generate better results. No matter what, having an accurate picture of where your time goes is critical, because wasted time for you is a huge opportunity cost for your business.
A Note on Spreadsheets:
Spreadsheets are a startup business owner’s best friend for data collection. They’re simple, can be made for free with a google account, and can be extremely powerful for delivering insights if you know what you’re doing. As you get further in, however, you’ll begin to find that some of the answers you want lie beyond what’s collected in a single sheet, and you need to do things like cross reference based on a common field. Now I know I’m jumping ahead of myself here, and I’m not going to go into that in detail yet, but there are a couple important things to start immediately so you don’t lose a ton of good information when you realize you aren’t prepared for it.
- Keep a machine-friendly copy
By machine-friendly, I mean back to the basics – no formatting, no side notes or calculations, just a bunch of ugly rows with one row of headers. For the colorful, complicated mess I showed you above, the machine readable version looks like this:
Now if I was trying to read this, it would give me a headache. For a computer though, it makes a lot more sense, because there aren’t a bunch of white spaces, duplicate headings, and extra things on the side. The important thing here is to collect data that is prepared to leave where it’s hosted at the moment, so you can take advantage of more powerful tools down the road without having to either spend hours on hours converting things, or simply lose all of the historical data. You’ll notice most of the cells in the above aren’t actually values, but references to the values in the human-friendly version – that takes a little time to set up, yes, but once you do, you don’t have to go in and re-enter everything twice, it simply pulls it in for you.
- Make some kind of key
The ability to cross-reference multiple data sets is really important as you grow and get more complex. In order for the computer to be able to do that, though, there has to be at least 1 field that is identical between the data sets. Some examples of this include the service name, customer ID number, IP address, employee name, location, source, etc. It can be any number of things, but there has to be at least one that is in common between the sources for them to be able to work together. For a startup, some of the best include employee names or IDs for tracking efficiency and performance across multiple clients, services, projects, times, etc, or IP address, so that your web analytics can talk to your lead capture methods and you know who did what and where before they gave you their info. More and more CRM / automation systems are including their own tracking code so that they can set this up for you, and show the entire timeline of a lead more accurately. The point is to identify the possibilities and implement the ones that are the most relevant to your specific business. Think big, identify the future needs, and set the basics up now, to make it a whole lot more useful later.
Once you can identify the cost and profit associated with each section of what you do, and can accurately track time as your greatest business investment, you have the basis for some very powerful analysis later on. Here’s the catch. The secret isn’t really in setting all this up and being able to pull cool numbers out. The secret is in having the discipline to update and records things consistently. The coolest spreadsheet in the world is useless if you don’t put data into it. You can do this yourself, or invest in automated tools to do some of the heavy lifting for you, but either way you have to actually record the data.
As a little reward for making it through the entire article (or skipping to the TL;DR, shame on you), here’s a sneak peek of what’s coming throughout the rest of the series:
- Top free (and almost free) tracking tools and how to set them up- This will bolster your data collection methods outlined here, and give you a wealth of information to work with
- Pulling it all together: How to Integrate Your Data into a Single Platform- now that you have all of this wonderful data, it’s time to get things together and start working the magic.
- Avoiding Information Overload: How to Calculate what you Actually Need and Not Waste Time on the Rest- Information overload is the Achilles heel of the analyst and decision maker alike. By focusing on only what you actually need to make a decision, and a few other tips and tricks, you can avoid this deadly mistake.