The ABCs of How Your Business Works: Q&Q
As a consultant working with small and growing businesses, I can confidently tell you that the most successful small business owners have a clear understanding of the fundamentals of their business and can explain what they do in relatively simple terms. Over the years, I've learned that these fundamentals can be taught and summarized through use of letter pairs, and today I'm going to teach you some business fundamentals using one of these letter pairs. Last time we started off by talking about P&Q, price and quantity. Today, we are going to jump into Q&Q!
In this context, the two Qs as I call them stand for quantitative and qualitative. Substantially all the information you use to run your business can be broken down into these two categories. Here are some definitions to get us started:
Quantitative information can be easily expressed and analyzed in terms of numbers. For small business this could be:
The number of customers
The sales price of the good or service
The operating costs that the business encouraged to keep the lights on
The amount of cash reserves in the business bank account
Customer acquisition costs, monthly recurring revenue, and other financial ratios
Understanding quantitative data is important because in their most basic form, the numbers do not lie and act as a baseline indicator for the health of the business.
Qualitative information is the information that cannot be easily expressed in terms of numbers. For a small business this could be:
Your reputation as a business owner
Customer satisfaction (which can be quantified in the aggregate over time, but not for a small number of customers in a shorter period of time)
The perception of your product or service in the marketplace
Your level of burnout as an owner operator
Your ability to remain effective as you grow your business
Qualitative information is critical because even though the numbers don't lie, they aren't everything.
Why is this so important?
Now that you know the difference between qualitative and quantitative information, we need to answer the question "why is the distinction so important?" Most small business owners tend to understand one of these types of information better than the other. As a result, the business operation tends to focus more on certain areas relative to others, effectively neglecting the areas where the business owner is inherently weaker at understanding. For example, business owners that are better at working with quantitative information are more likely to focus on their financials and other measurable metrics, but they might not understand marketing or customer satisfaction since those are harder to put in an Excel spreadsheet. As a result, these areas of the operation might be underdeveloped despite them being excellent investments for the future of the business. Inversely, business owners that are better at assessing qualitative information might neglect the quantitative information (such as finances) more often than they should. I've seen plenty of businesses fail to reach their full potential because the owner didn't understand the quantitative financial fundamentals like cash flow.
On top of neglecting the areas that they're weaker in, business owners also do not realize how qualitative and quantitative information can work together. Here are a few examples where both qualitative and quantitative information need to be considered together:
When using subcontractors or consultants, the price (quantitative) should be compared to the quality of the work (qualitative), cheapest isn't always the best option, and expensive doesn't always mean it's better!
Raising prices (quantitative) of the service or goods provided should be carefully considered alongside customer satisfaction and retention (qualitative).
Giving a customer a special discount (quantitative) can develop goodwill (qualitative) which can turn into better business down the road.
Denying an employee’s request for a raise to the market rate (quantitative) can cause them to lose motivation and eventually leave for another job (qualitative).
Not hiring additional employees to save on costs (quantitative) will leave the existing employees overworked and burnt out (qualitative).
In each of the above examples, the potential impact of the qualitative information is so large that it should be presented alongside the quantitative information when making decisions, even if the immediate impact cannot be put into numbers.
If you are a small business owner or are thinking about starting your own business, I invite you to consider these questions:
Are you more naturally drawn to quantitative information, or qualitative information?
What is the quantitative data that your business model should be observing, recording, and analyzing?
What is the qualitative information that may not be captured in that data? How can you document it?
How can you best analyze and make decisions using both qualitative and quantitative data?
After you’ve read everything above and answered these 4 questions, you’re one step closer to understanding how your business works!