Does
Your Business Measure Up?
By Vistage speaker
Josh Patrick
Many chief
executives want to make their businesses more profitable, but they may not
understand how to get started. Their first challenge typically is
measuring accurately what they do now. After all, before there can be any
improvement, there must be a good baseline of measurements in the
business—measurements that can have a real impact on the business.
Most businesses we
see have a profit and loss statement of some sort. This basic financial
report tells owners whether they are making or losing money for the tax man,
but it doesn’t tell them if they are making or losing money for themselves.
Among the financial
statements that the business’s accountant prepares are the balance sheet and
cash flow statement. This is usually the starting point for identifying a
company’s key metrics or measurement systems.
But profit and loss
statements are just the starting point. To truly understand your business
you must first find the numbers that drive your business. Once you figure
out what the drivers are, it’s time to start measuring them. We call these
drivers key metrics. Understanding those key metrics can often mean the
difference between mediocre and outstanding corporate performance.
Key Metrics:
A Definition
A key metric is a
numeric measurement that can track the profitability of your business. It
might be something from your profit and loss statement, balance sheet or
cash flow statement. More often than not, it will be a number that you
gather outside your normal accounting functions.
For example, most
businesses don’t know which customers make money for the business and which
customers lose money. Ranking customers from most profitable to least
profitable is always a useful activity. And, this activity is often more
difficult than it looks.
It’s easy to find
out which account produces the most sales. The problem with this approach
is that the accounts producing the most in sales are not always the ones
that produce the most profit. In fact, many times, the accounts that
produce the most in sales can actually cost your company money.
You might ask
yourself: If it’s not our regular statements, what should we measure?
The first step in
putting together a key metric program is deciding which measurement will
have the largest impact for the least amount of effort in your business.
This is the low-hanging fruit.
Continuing with the
example of evaluating client or customer profitability, you should first
figure out which customers made the most money for your company. You would
first build a demographic profile of that customer, then find the attributes
that all the best customers have in common.
Once you have a
profile of your best customers’ common attributes, you can build a marketing
program that attracts more of these clients. You also now have a profile of
the customers who cost the company money and can figure ways to make sure
that the sales department stops selling to this type of consumer or
business. With the proper information, we can communicate the appropriate
information to the right people in our organization.
They can now start
to make plans to improve the focus on our key measurements.
Measurements
All Companies Should Look For
The following
metrics are the most-often useful when it comes to improving company
performance:
-
Return on assets of
the company
-
Return on equity for
the owners of the company
-
Gross profit
-
Profitability per
customer
-
Profitability per
product line
-
Net- free cash flow
The metrics that you
choose will depend on your business’s largest opportunity. Installing a key
metric program is often an early step that companies take when they are
changing the focus of their company from tactical to strategic activities.
Often the company
will start a measurement program that shows how well the company is doing.
A logical next step is to combine a key metric measurement program with a
bonus compensation system that ties key metric improvements to individual
and group compensation. Measuring, sharing and compensation that is based
on key metrics will improve your company performance.
Having a total key
metric program in a company is a strategic activity. It moves the entire
company to focus on what’s important. Tactical excellence is a given in
excellent companies. Strategic excellence is what moves a company from good
to extraordinary.
Getting to a different outcome starts with identifying and taking action on
your company’s best key metrics.
Josh Patrick,
founding principal of Stage 2 Planning Partners in South Burlington, Vt.,
specializes in working with closely held businesses. He can be reached at
jpatrick@stage2planning.com.
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