http://www.inc.com/alan-ying/the-one-number-that-changes-everything.html
If you look hard enough, you’ll find there’s just one number that tells you all you need to know about running your business. The trick is finding the right one.
By Alan Ying | Feb 14, 2012
My concept of a “golden number” is lifted from a PBS show I watched as a kid about the “golden ratio,” a number with seemingly magical significance. The ratio– approximately 1.6 – reappears in descriptions of everything from atomic spin and crystal formation to human brainwaves, artistic beauty, and snail shells. (video here).
After I got my first company up and running, I looked for a golden number that would help me understand my business. I wasn’t trying to find appearances of 1.6. I was seeking to simplify, to pare all my reporting down to a single metric that got to the heart of how the company was doing.
Every company has lots of important numbers, and all of them are related, so at least in theory it should be possible to distill them down to one key metric.
We sold software to hospitals. In our early years, the most important metric was our sales cycle time – we needed to add customers fast. Later, it was implementation time – product “go lives” governed our revenue recognition and cash collection. After that, it was “unrecognized revenue” – basically how much backlog we had. Then it became “maintenance profit per customer type” – we needed to focus on the most profitable sources of recurring revenue.
Of course, the golden number doesn’t live in a vacuum – the cost of customer acquisition matters, marketing efficiency matters, product unit economics matter… everything matters when you’re the CEO. But in businesses of all sizes and kinds, certain numbers matter most. Even when I was responsible for a large complex division of a public company, I was able to identify a golden number.
Try this exercise: Pretend you’re stranded on a desert island. You can run your business by delivering messages to your managers, but they can only send you one message a day with one number on it. What would that number be?
A couple things to remember in your search for the golden number:
The golden number may change over time, but not day-to-day
The golden number is almost always going to be a calculation based on multiple, more standard metrics
Often you need to dig into your operations to collect the right data.
It’s hard work to find your golden number, but in my experience it’s well worth it.
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