How do you make important financial decisions for your business? Do you fly by the seat of your pants and go with your gut instinct or are you more methodical in your approach? Sometimes our instincts can be right. They can also be great at spurring us on to move things forward, especially when making important financial decisions about our business health. It’s never an easy decision to know whether to trust your gut instincts or hard data to move your business forward.
Trusting our gut instinct is a common practice among entrepreneurs and small business owners. According to a poll by the UK’s Daily Telegraph of more than 2,000 small companies, more than half of entrepreneurs (56%) admitted to relying on gut instinct to make key business decisions.
The Merits of Going with Your Gut
The results of the Telegraph’s poll also suggest that one of the strengths of small business owners is that they can think on their feet and be more flexible when opportunities emerge. Take Jo Malone, for example. The powerhouse perfume business owner who sold her “Jo Malone” brand to Estee Lauder in 1999:
My gut instinct is something I rely on every day — with the packaging of the product, for example. My instinct is telling me one thing and reality is telling something else. I rely on my gut instinct all the time in business. If something doesn’t feel right, I’m not going to do it, which can be very tricky in a team and in a small business she told the New York Times.
That being said, Malone is not shy about the dangers of relying on your gut:
“I’ll run with something because I truly believe it. If it goes wrong, it’s on my head and I’ll have to take responsibility for that, and I do. But when it’s an entrepreneurial business I can already see the product, see the shop opening in New York. I’m already there in my mind, and the reality is that I sometimes jump too quickly for the business and for the people in it.”
So how do you reach a happy medium of being propelled forward by your gut, without jumping in too fast and bringing your business crashing down with you?
It all starts with knowing your numbers (aka analytics).
How to Drive Business Decisions with Analytics
We all make gut decisions in our personal and business lives – such as taking a new job or choosing one route to a destination over another. But these decisions are usually made when you only have so much information to go on.
That’s not an excuse in business. With the amount of supporting data you have at your fingers, there’s no reason to ignore your financials when making decisions.
Whether you’re planning on bringing on a new employee, budgeting for a marketing campaign, investing in a new product line, or just restocking inventory – listen to your gut, but be sure to wrap your arms around your financials too.
How much do you make?
How much do you sell?
What’s your cash flow cycle?
What trends are you seeing?
Use your accounting dashboards, talk to your accountant – use all the tools you can to enable better decision making. For example:
Do historic sales trends and forecasts support your decision to stockpile inventory ahead of busy season or in support of a product push?
Is your cash flow sufficiently positive to ensure that you can make a new employee’s payroll each month?
What’s your true cost-of-goods-sold (COGS) and how is that impacting the profitability of current and future business lines?
Check out this blog for some other key financial indicators and the decisions they can help inform.
If you review your financial statements on a weekly or monthly basis, alongside your instincts, this is your roadmap to success.