5 Vital Signs To Monitor and Improve the Health of Your Business

What you need to be watching to secure your small business success
April 10, 2011

Small-business owners play a heroic and hazardous role in the U.S. economy. They employ about half of all private-sector employees, and they have created 60 to 80 percent of all new jobs annually over the last decade, the U.S. Small Business Administration reports.

But business-mortality rates are high. Government data show that in recent years, for every 10 companies with payrolls started in the United States, at least eight were closed. So any edge in monitoring small-business vital signs can spell the difference between success and failure.

Successful small-business owners tend to follow the money. Cash flows and profit margins, in particular, are key performance indicators that deserve a business owner’s constant attention—and that can’t be overstated. But experts say numbers don’t tell the whole story: Non-financial indicators of business progress are important vital signs, too, though they may defy easy measurement.

Employee morale, for example, may be harder to measure than sales and profits, but it also may indicate the future direction of a small company’s financial performance. “I think big businesses and small businesses underrate the importance of their employees,” says Rhonda Abrams, who runs The Planning Shop, a Palo Alto, Calif.-based book publisher, and writes a weekly financial column for USA Today.

Your team is critical for your business success. Some other key aspects to monitor include your market and customers, growth and innovation, your own attitude and your business plan.

Your Team

Employees’ happiness is often the most important non-financial vital sign for a small business to monitor, says Jennifer Openshaw, author of The Millionaire Zone and other books for entrepreneurs and investors. “If they’re not happy or they’re griping about you, it’s going to impact your bottom line,” she says.

While conducting formal surveys is one way to measure employee morale, less-formal surveillance also can produce useful results. “The signs to look for would be negative talk; just the look on their faces, body language,” Openshaw says. In addition, “There are people who become hubs of information in a lot of companies, and if you’re a CEO, your assistant should be one of those hubs.”

Business owners need to be sure they have the right people onboard, says Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, a research and advocacy organization in Washington D.C. If an employee isn’t pulling their weight, other employees’ morale—as well as productivity— could be affected. “Really having the best people, the right people, and communicating with the team on an ongoing basis are critical. So is engagement and training,” says Kerrigan, also the founder of the nonprofit Women Entrepreneurs Inc. “The more fulfillment they get, the better you’ll be able to retain them, and that’s a big issue.”

How do you know you have the right team members? Do a human capital audit—look at what you do and how you do it given the dynamics of the marketplace, Kerrigan says. “Certainly, if employee engagement is really low, where there’s little communication or lack of creative ideas or input, if the business lacks energy, you know it. You can feel it. From a bottom-line perspective, if production is suffering, sales are down, customer complaints are up, you have a problem and it needs to be addressed.”

With employee issues, be a communicator and don’t procrastinate. An employee’s morale problem may not be work-related, or maybe it affects everyone on some level and could become a bigger problem. Getting to the source of one employee’s low morale could provide an opportunity to head off bigger problems—when you find out the problem, consider taking it back to the team to ask for suggestions and solutions, Kerrigan says.

Your Market and Customers

Monitoring the vital signs of the marketplace is another key to success. “The most successful entrepreneurs are market research animals,” Kerrigan says. “They religiously analyze trends, what’s happening in the marketplace, competition and, most important, they seek feedback from customers.”

Changes in the volume of repeat business and referral business, for example, may indicate shifts in customer satisfaction. In that case, it may be time to survey customers about products and service, or to do a competitive analysis, looking at competitors’ ads, online presence and how they position themselves in the marketplace, Kerrigan says. “You’d be surprised how many businesses do not go to their customers to ask,” she says. “Some business owners I talk to say, ‘I made assumptions about why my customers were buying and realized there was a total disconnect. They were buying for totally different reasons.’ ”

Whether local or national in scope, economic vital signs can guide small-business owners in timing major investments and initiatives. “Maybe this is not the year to do something to put yourself on the leading edge,” says Jim Blasingame, author of Three Minutes to Success and Small Business Is Like a Bunch of Bananas.

Every year, small-business owners face challenges and opportunities—Blasingame calls them the “odd couple” of business life—and whether the challenges are bigger or smaller than the opportunities, “the odd couple is always with us,” he says, “in good years and in bad years.”

Growth and Innovation

Small-business owners must continually push to innovate and ratchet up growth—and to encourage employees to do so as well. You don’t have to create new products, but you do need to pay attention to the market, listen to customers to improve products and services and innovate to keep up with changes.

While it’s easy to become insular and focus on getting the product out the door, small-business owners have to stay engaged, networking to gather new ideas and find new business partners, Kerrigan says. Advisory boards of peers are also effective in helping guide and grow the business, in providing counsel and contacts and getting you through the difficult times, she says.

Business Plan

“Many, many small-business people and entrepreneurs are very busy, but they’re not necessarily making progress,” says Abrams of The Planning Shop. “You want to make sure you’re moving forward, and the only way to do that is with a business plan.”

If you don’t have a business plan, go online for numerous resources that provide guidance in preparing it, or check out the library or local bookstore.

“You’ll probably achieve your goals much faster if they’re written down,” Kerrigan says. “If you do have a business plan, remember it’s a living, breathing document. You need to review it, and make sure the assumptions and projections outlined in it align with economic conditions.”

Many entrepreneurs have a penchant for action that overshadows their persistence in executing a business plan. Some become so immersed in operational details that their ability to track strategic direction is marginalized and compromised.

“They come in Monday morning with a list of things they want to get accomplished that week that are big-picture things,” says Wayne Rivers, president of The Family Business Institute, a consulting firm in Raleigh, N.C. “At the end of the week, that list is untouched, because all of the emergencies have crowded them out.” A typically busy entrepreneur might work 50 hours a week in the day-to-day operations, he says, “and spend 10 hours a week trying to run the firm, trying to take care of morale, trying to work on HR [human resources]. It’s way lopsided.”

Small-business owners who closely monitor how they allocate their time and energy may learn to adjust their priorities and improve their productivity. “One of the executive-coaching things that we’ve done recently is to challenge some of our clients to keep a time log for one or two weeks,” Rivers says. His firm has a downloadable time log available on its Web site, and “if they keep that log for a week or two, in 10-minute increments, and then evaluate how they spent their time, they’ll be flabbergasted,” Rivers says.

“Usually, it’s all task-based stuff: worked on an estimate, managed a project, had an employee disciplinary action, responded to an irate customer. How much time is spent in business development, which is a key role of the CEO in most small companies? How much is spent on leadership development? How much is spent focused on morale? Virtually none is.”

Your Attitude

The most successful entrepreneurs are truly passionate about what they do. Kerrigan says a business owner’s attitude is an equally critical vital sign for success. “Has your initial excitement in starting the business all of a sudden turned to dread?” she asks. “Do you still like what you’re doing? Obviously, you can’t engage people and funders and potential partners if you aren’t passionate. You cannot lead the organization if you aren’t passionate.”

If you feel burned out, Kerrigan suggests a passion check: Think about why you pursued the venture and what got you excited in the first place. If you can’t rekindle the passion, possibly it wasn’t the product or service that interested you but the idea of starting a business, she says. In that case, maybe you need to sell your current business and start a new one. Entrepreneurialism is addictive.

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