When your customers, clients and most people in your life ask, “How’s the business going?” The best answer is “Terrific!” There’s no upside to giving any other response.
When your business advisor asks the question, understand that, whatever answer you give, the next question will be, “How do you know?” It’s an important question and cuts to the heart of whether your management team has true situational awareness.
Have you heard the joke “I can’t be out of money I still have checks!” Monitoring and understanding the key metrics of your business provide the tools for day to day management. When well defined, they also serve to bridge the business strategy and the everyday operational tactics.
So what might those “key metrics” be? Well, the term begins with the word “key.” Turns out there are literally dozens of metrics from which to choose. The first task in determining key metrics is to be clear about to whom they are key. Investors will prefer some (EBITDA, ROI, etc.) and bankers want (return on cash, debt to equity ratio, etc.). Accountants will choose familiar financial measures (net profit, margins, etc.) while production management will choose process metrics (reduction of steps, increased throughput, etc.). In practice, high performing organizations typically have a few shared goals for the whole enterprise and then functional and subgroups develop specific key metrics that clearly map to the overall goals.
Before we leave the concept of “key,” it must be said that the number of keys needs to be small. A list of 25-50 metrics, by definition cannot be key. The list is best kept between three and seven to create a clear focus among manager and employees and highlight what is truly important. This is especially true when targets for key metrics are being used to drive performance and process improvement.
Let’s return to the second part of “key metrics.” Author Robin S. Sharma is credited with originating the phrase “What gets measured gets improved.” Business metrics are quantifiable measures used to track the performance of specific processes. So assembling and maintaining metrics have several benefits. One is that it provides management and employees the net effect of their strategies, processes, and effort. The second benefit is what is famously called “The Hawthorne Effect,” derived from socio-psychological aspects of human behavior studies done at a Western Electric Company lighting factory in Hawthorne, Illinois. After experimenting with changes to a number of workplace environmental factors, the unexpected result was that the simple act of paying increased attention to employees was what led to better productivity.
While current specific business conditions and goals will naturally suggest which metrics are worthy of focus, suggestions from other sources abound. Inc. magazine’s contributing editor, Jeff Haden, suggests that beyond profit and loss, businesses should not ignore customer-focused measures, including Cost to Acquire Customers, Lifetime Value of a Customer, Churn Rate (turnover of customers) and Revenue percentages from each revenue stream.
A more traditional list of key overall business metrics would include cash flow and cash burn rate (Yes! Cash is king!), accounts payable, accounts receivable, direct costs, operating margin, and net profit.
Martin Zwilling offered his recommended list for small and emerging businesses, largely derived from the world of six-sigma process improvers who have refined their skills in large companies, in a 2011 Forbes article. They include sales revenue, customer loyalty and retention, cost of customer acquisition, operating productivity, size of gross margin, monthly profit and loss, overhead costs, variable cost percentage, inventory size and hours worked per process.
Whatever metrics are truly key to your business, how you use them is most important.
- A current measure paints the picture where the business is at the moment.
- More telling will be a trend analysis that, hopefully, shows the good measures increasing and the bad measures decreasing.
- How the compiling and analysis of metrics are shared within the organization is an opportunity to engage these managers and employees in taking ownership and pushing for improvement.
- How the metrics are used to drive continuous process improvement by managers and employees trained in those skills can create a positive ROI for the time invested collecting and viewing metrics.
- How incentives (pay, bouses, awards, recognition, etc.) are tied to improvements is key metrics.
Bottom line, you’re not really running your business if you don’t have a clear vision of how it is performing and the opportunities to make improvements. Measure things that matter and decide which ones are truly key to driving the business to success.