What You Measure Can Quietly Control Your Life

(Transcript edited for clarity.)

Hi, I'm Wes. Welcome to What You Measure Can Quietly Control Your Life. And I might even take that a step further and say what you measure does control your life. Not can. It does control your life.

So if there's anything important in your life, you need to measure it. You need to track it.

When I do a lot of consulting for businesses, I have for decades now. I'm a business consultant amongst all the other things I do.

And almost 100% of the time, the first thing I do when I go in and start consulting with a new business is I see what they're tracking. Because you literally have to track everything if you want to improve a business.

And this is true in any size business you work with or work in. Whether it's a mom-and-pop storefront, whether it's an online business, whether it's a huge corporation.

I've worked with businesses from startup businesses all the way up to billion-dollar businesses. And they're all basically the same at the core when you start looking for ways to improve them.

So, and that means I track everything.

For example, one of the businesses I used to work for not too long ago, we went in and it was a profitable business. No doubt about it.

It was a solid business. It has protection, or what some call a moat around it. It was doing well.

It wasn't struggling. And it probably wouldn't struggle in the near future or the long-term future. It was a good business.

But they really hadn't been tracking everything. And the first thing I did is I went back two years and tracked every penny coming in and every penny going out. Now, to me, that just makes sense.

But the more and more I consult with businesses, I learn that most businesses do not operate that way. They usually track some things, but they cannot tell you where every penny comes from or where every penny goes. And then I get a complete picture of that.

Now, I mentioned two years. It's best to have this for longer. You need to have it at least for the last year.

But really, two years is the minimum I like. Because once you have that kind of data, then you can start tracking day-to-day, week-to-week, month-to-month, year-to-year.

For example, if it's getting to be December, you're getting ready in your business or whatever for December. I want to look at the last two Decembers to see exactly what happened in the business the last two Decembers, so I can try to see what might happen this December, but also find places where I might be able to improve.

You want to improve year-over-year, month-over-month, day-over-day. And if you're not tracking everything, then you have no place to start.

Now, this is mostly a business conversation. But it also is relevant to personal success or success in your life. What should you be measuring?

And here's the question for today: Are the things you're tracking pushing you towards the outcome that you actually care about?

So the first question is, are you actually tracking everything that you should be, or measuring everything you should be? And if not, you should start immediately.

Then you can identify the things that you're actually measuring or tracking to see if they're the ones that are actually pushing you towards the most important goals that you have.

So here's some of the reasons why this is so important. Measurement directs attention, and attention influences your behavior.

If you want to improve something, start measuring it or tracking it. Just the process of starting to measure or track something will make you focus more on it and hopefully, usually, help you improve it.

I worked with a business, this has probably been 25-30 years ago, and it was a small used bookstore.

They also sold some new books, but mostly they were a used bookstore. And I went in and I talked to the owner. That's a small operation, but it was surviving.

And I said, well, how much money are you making? And he pulled out his checkbook and he showed me his checkbook. And he said, this is how much money I have in my checking account.

I said, okay, what are your sales? He says, I don't know.

I said, you don't know how much you sell on a monthly or yearly basis? No, I don't know.

I said, okay, well, it's going to be awful difficult to figure out if you're profitable or not.

He says, well, I got money in my bank account.

And I said, that means that you're cash-flow positive, but it means nothing about whether you're profitable or not.

And now, he was a good guy. He was making enough to survive. I liked him, but he had no idea.

He'd been in business for several years too, but he had no idea how profitable, or even if, the business was really profitable. As it turned out, it was slightly profitable.

But once we started compiling the figures, started measuring things, then we were able to put some systems in place to increase the profitability of the business beyond just looking at cash flow.

Because basically, we don't all use checkbooks today. Now, banking's different, et cetera. But at that time, that was basically everything.

When he sold something, the money went into the checking account. It was deposited locally. And then every bill he paid, whether it was for the electric or the rent or for new inventory, he wrote a check for.

So that's how we tracked everything. So all the information was there. We just had to start tracking it and pulling it out.

Now, this can be quite complicated, but it doesn't have to be at the beginning. To get started, you just start by identifying things that you should track and start tracking them or measuring.

Easy-to-count metrics are not always the metrics that matter most.

For example, many small businesses focus on sales, which sales are important, but net profit before taxes is the most important number.

Again, you've got to have sales, but if you're not making anything, if you're not making any net profit before taxes on the sales you're having, more sales is not the answer.

First, you need to increase your net profit before taxes, and then you start figuring out how to increase your sales while maintaining a larger net profit before taxes.

The other way to increase net profit before taxes, it's not always selling more, sometimes it's spending more. Here's a simple example.

If you're selling a product for $10 and it costs you $7 to buy it and sell it, when you sell one, you make $3. That's profitable, and if you sell more of them, you make more $3 every time.

However, with the exact same sales, if you can figure out how to either buy it less expensively or your cost to sell it can be reduced, you can make more money.

If you're selling it for $10 and it's been costing you $7, including cost of goods sold and your overhead, then that's a $3 net profit before taxes.

If you can reduce your expenses or figure out how to buy it a little less expensive, or a combination of those things, and it now costs you $6 instead of $7, then every time you sell one, you make $4 instead of $3.

Now, that's very simplified, but that's basically how business works.

You look at your sales numbers, you look at how much it costs you to sell whatever, and the difference, hopefully there's a difference there, the difference is your net profit before taxes.

You increase the net profit before taxes, you increase that gap between the selling price and how much it costs you to sell it, and that's how you increase your profits.

Then, once you've increased your profits as much as possible, then you figure out how to sell more with maintaining the same net profit percentage.

So, again, rough numbers, if you're selling it for $10 and it costs you $7 to sell it, whatever it is, including cost of goods sold, that's a 30% net profit on the sale.

If you reduce it to $6 from $7, that's a 40% net profit on sales.

So, if you try to increase your sales from $10 to $20, then can you do that while maintaining the 40% net profit percentage?

Now, sometimes, and you get to choose this, sometimes you can't. But if you can double, if you can go to $10 to $20, and instead of staying at 40%, you might drop to 38%, it's still worth it.

But if it costs more to double, if you double your sales but you go from 40% to 20%, that's not worth it.

You would think that would be break-even, you would be break-even on your bottom-dollar net profit, but you'd have more work in selling twice as many.

Again, I'm not trying to over-complicate this, but the point is, without knowing all of this, without measuring it, without tracking it, you have no idea what you can do or need to do.

So, again, I've been talking a lot about business, and if you have a business, any size business, this is really important to you. You should do this.

You should start tracking everything immediately, and then you can use those numbers, what you're tracking or measuring, to find places to improve.

But this is not just for business. This is anywhere you're trying to improve your life, or your systems, your success. It doesn't have to be in business.

What is it that you're not tracking now that could help you, and what are you tracking that you might be able to track better or deeper to help you intentionally make decisions to improve whatever you're working on?

So, choose your metrics, and I'm going to go through another quick example here.

Sometime I'll put together an episode for business numbers, but just to keep it simple, you need to track in business.

You need to track sales, cost of goods sold, which is how much it costs to buy whatever it is that you're selling.

So, if you're selling something for $10, and it costs you $5 to buy it, then you track everything else, all your other overhead, everything else it costs, whether it be your rent or your electric or your employee expenses, etc.

And in the first example, you're selling it for $10, it costs you $5 to buy it, and it costs you another $2 for every one you sell in overhead, and that's how we got to the $7.

So, the $10 minus the $7 leaves the $3 net profit.

So, you don't always have to buy the product less expensively to make more net profit. You can reduce your other costs to do the same thing.

If you reduce it from $2 to sell one in your overhead to $1.50, then you've added 50 cents on every one you sell to your bottom line.

So, you've taken it from $3 to $3.50 net profit, which increases your net profit percentage from 30% to 35%.

So, again, are the things that you're tracking pushing you towards the outcomes you actually care about?

This is Wes with Your Life Systems. It would help me a lot if you'd subscribe, like. I'll see you soon.

What's Next?

·        Choose one outcome in your business or life that you want to improve.

·        Write down what you currently measure or track related to that outcome.

·        Identify any important information you are not tracking yet.

·        Ask whether the metrics you use actually connect to the result you care about.

·        Start with a simple baseline so you can compare future results against something real.

·        Review the numbers regularly and use what you learn to make one useful adjustment at a time.

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