Measure What?

“What gets measured gets managed”.  A quote attributed to Peter Drucker.

Keeping close tabs on the performance of the business is critical, particularly as our economy works its way through this recovery. Managing a business requires a broad set of skills and attention to all parts of the business. Often CEO’s are good at making or selling “things” (goods and service offerings) but some don’t spend enough time monitoring the overall health of their business.

Many people are unsure of what to measure and find it confusing to determine what metrics to monitor and how to take the measurements. I like to start with some straightforward financial metrics that can be implemented quickly so you start managing based on up-to-date information. That way you start getting a return on your investment whether you use QuickBooks, SAP or any other system. These metrics can be done using something as simple as a spreadsheet or with desktop or online dashboard tools.

The easiest things to monitor are sales and cash on hand which are likely to be available in your accounting system, but that is only part of the picture of your business. Positioning the company for growth requires additional effort to understand and monitor not only sales but also those activities that impact profitability and cash flow.  A key to successfully growing the business is identifying a set of key metrics that provide the visibility to help chart the course for your company’s growth, so let’s review “What to Measure”.

Margins - The first step is to understand your gross profit margins (sales minus cost of sales). Begin by segmenting sales into groups of products or services that are similar, such as product families. Segment the cost of products and services into those same groups or product families. This will enable the monitoring of margins by product family and make decisions about pricing and position you to monitor costs in each product line.

Expenses – Next, monitor those costs that create and market the products and services, such as research and development, marketing and sales expenses. To the extent possible, group the costs to design and market products so that those costs can be compared to the margins generated by the sales of those products to facilitate decisions about continued and new investment.

Receivables – Once the products and services are sold and the quicker the receivables are collected, the sooner the cash is available for supporting the business. Speeding collections starts with taking orders accurately, invoicing correctly and following up with customers to ensure that all steps have been done by your company to support the customer’s payment approval process. Measuring these key steps will help reduce issues and speed collection resulting in better cash flow and reduced write-offs and increased profits.

Inventory – If your company creates or buy products for resale, measure how quickly the overall inventory turns (inventory used or sold), and if the company has a process that supports it, measure how quickly groups of inventory turn. Every dollar tied up in inventory is a dollar in cash unavailable for other operating needs.

Operations – Look for operational metrics such as employee counts, number of hours billed, square footage, etc. Besides looking at those operational metrics, try to combine financial metrics with operational metrics to provide a fuller picture of the business.

Measurement steps – Create a dashboard using a spreadsheet or by purchasing a dashboard product. In either case, look for a balance between the level of effort to collect the data and the frequency of providing the information. Start at a higher level of information, such as with financial benchmarking, and keep it simple. Add more complexity like operations as additional areas are identified that warrant more analysis. Look at the trends in the metrics over several years to get a big picture view about where things are improving and where attention is warranted. Also, check with your bank to get industry standards so that a baseline can be established for comparison purposes.

By frequently measuring the important trends in some sort in your business you will be better able to manage it and you will be in a better position to control the growth of the business. Good luck!