Any time I look for information about how small businesses fare financially, and any time someone sends me related articles and studies, I am left feeling like having just eaten a meal that wasn’t very satisfying, similarly unsure if it was healthy for me to consume.
What I am talking about is our penchant for sentiment surveys and top-line studies.
Sentiment surveys have very little scientific merit. Anyone who thinks about it for a minute can arrive at this conclusion. Whenever you ask a class of workers how they feel about their industry, their business, the economy, etc., no matter how large the sample size, what action can really be taken away?
For example, I just read an article that reported 32% of small business owners feel the economy is worse than six months ago. So does that mean that a third of our small business owners don’t know that the economy is actually better off, or that two thirds don’t realize that it’s worse? Which should alarm us more? Naturally, news about the economy is verbose, conflicting and complex. So there will never be universal agreement on interpreting it. Nonetheless, does the sentiment survey help us? If a third think we aren’t doing so well, does that mean we need to act or not? What action should we take – something toward improving the economy as judged by a smarter minority or a PR campaign to convince the third that they are not smart enough to get it right?
In the end, sentiment surveys create the potential for detrimental reliance on something that really means very little. What if a third of respondents just had a cat that died or are similarly having a bad day?
On the other hand, top-line reporting is at least based on numerical data and far better than sentiment surveys. But think about this: if sales go up ten percent and this gets reported without reporting that gross margin went down two percent and location while labor expenses increased, does reporting and commenting on the top-line create an artificial impression of business health with no understanding that the bottom line is shrinking? No wonder one-third to two-thirds of those who respond to sentiment surveys are wrong.
If we are serious about small business, then we need to be equally serious about business performance reporting. In my opinion, we aren’t serious unless we start chiefly and most-often from trending the bottom line. Without looking at small business’s real net-profitability, we are just creating noise and learning very little that we can reliably act upon. Ironically, the financial transparency of government, often criticized, is much higher than the financial transparency of small business performance. Imagine results being released by stock-traded companies that don’t report net earnings. Would you buy?
Therefore, let’s focus less on how we feel about how we’re doing, or how we should all, like moths to light, flock toward top-line sales trends. We must continuously be starting with how the bottom-line looks. I guarantee that if we start there, and allow our analysts and pundits to then follow the money up the P&L to answer questions about why the bottom-line is what it is, we will all gain much better information more efficiently and be able to react appropriately to raise all boats.
If everyone cannot agree on this, then we ought to forget the trade show floors in Vegas and just agree to meet in the casino to enjoy uninformed risk-taking.