If a business is to attain true and lasting success, it can’t rely on old news.
Counting on financial statements—snapshots of a business weeks to months old—to direct the future profitability of a business can lead instead to failure. To make the right decisions, a businessperson needs to know what is happening right now.
The get that information, a system must be put in place to measure all areas of business performance. The goal is to improve the quality and timeliness of the information available to decision-makers. After all, what can be measured can be managed.
A businessperson will quickly discover that it is the current non-financial numbers that are absolutely critical to the profitability of the business. By having relevant information more readily available, and the ability to identify trends more quickly, a businessperson will have the tools to manage the business more profitably.
It is vital to the success of a business that “Key Performance Indicators” (KPIs), discussed in detail a little further on, be monitored in a consistent and timely manner. This will yield instant feedback about all areas of the business’s performance so that adjustments to strategy can be made without potentially costly delays.
In the world of small business, owners and managers tend to spend the majority of their time working “in” their businesses rather than “on” their businesses. They become so focused on financial statement measurement that they miss seeing the big picture. Most wait until the end of the month or quarter—or even of the year—to see the outcome and assess how the business has fared. As a consequence, they are forced to make critical business decisions on a limited amount of already outdated financial data. Such delay may cripple their decision-making.
The concept and benefits of measuring activities are not hard to grasp: More information about the business—quicker! However, being able to identify the activities critical to the business’s goals does take some work. To simplify the process, the decision-maker should start by dividing the business into four key activity centers: Sales/Marketing, Management, Operations and Finance.
Under these four headings, KPIs are then defined and measured in order to provide better information for making critical business decisions in a timely manner. Some examples of KPIs are the following:
- Conversion ratios
- Average transaction value
- Frequency of customer contact
- Number of customer complaints
- Total staffing
- Sales per administration staff member
- Returns and rework
- Labour productivity
- Make-up pay / Overtime pay
- Accounts receivable days
- Operation cash flow
- Inventory turns
- Dead inventory
There are literally hundreds of potential KPIs to be measured in every business—each with the potential to yield timely information vital to decisions that optimize profitability.
Businesses that adopt this process should commit to it for a minimum of one year. Experience has shown it takes at least that long for a consistent and disciplined application of this approach to reliably identify trends and achieve long-lasting results.
With these feedback mechanisms in place, decision-makers will know what is currently going on without having to be intimately involved in every detail of the operation. Together, they function like the dashboard in a car, which relieves the driver of having to lift the hood every few minutes to check if the engine is performing properly. Decision-makers are then able to work “on” the business rather than simply “in” it, since they will possess the information needed to make timely course corrections as they navigate their businesses toward true and lasting success.