There is a significant disconnect between what determines successful business performance and how business owners and entrepreneurs measure their performance. The more entrepreneurs measure the right things, the more it will drive their success.
So why is it that so many aren’t keeping score of the things that matter most?
Before I answer that question, let’s understand exactly what’s happening to cause such a separation between the key drivers of success and what’s actually getting measured. I have asked many entrepreneurs and business owners this question over the years: “Did your business win or lose today?” I seem to always get a different reason for a win. Here are just a few:
- Daily sales were above a certain number
- No customer complaints all day
- No employees called in sick
- Collected an old receivable
- Renegotiated a supplier contract to save money on materials
- Everybody came to the holiday party
What’s interesting about these common answers is that none of them really drill into the heart of the business model, the core competencies that are the only way the company can make money and sustain itself. In his book Good to Great, Jim Collins explains the concept of an economic denominator, or the selection of one ratio that would have the greatest and most sustainable impact on your business model.
Every business model I have ever seen can be broken down into three or fewer daily measurable metrics. But most entrepreneurs fail to do this for several reasons, including:
- It’s much more challenging than it may appear to break a business down into the one to three metrics that encompass its entire business model.
- Most entrepreneurs believe it’s impossible to put into place the daily reporting mechanisms required to get the information every day.
- Business owners often resist relying on numbers too much because they are used to running their companies on qualitative and anecdotal information.
- Investing time and money into reporting is viewed as a necessary evil, not a source for gaining the clarity required to achieve strategic competitive advantages and improve performance.
Why bother to report on these things daily? Why do we need to know if we win or lose each day? Can’t I just wait to look at these numbers every week or month? Good questions, but they are focused on reporting as a passe, reactive process rather than a dynamic, critical element of the strategic direction of a company.
The right numbers in the right hands at the right time bring clarity. And clarity fosters strategic insight, which drives an entrepreneur toward obtaining competitive advantages. Yes, you can certainly gain a competitive advantage by knowing your numbers better than your competitors know theirs. In fact, Jim Collins’ book makes the argument that all of the great companies had refined their reporting to this daily level of detail, while all but one of the good companies had this part of their business figured out.
In six simple steps, any business can put a value-added process in place that will significantly impact your business:
1. Find the one to three core pieces of your business model. This may take several brainstorming sessions, and I recommend you talk to others in your industry as well as seek information and standard ratios for your industry from your banker, CPA, or CFO.
2. Calculate the numbers by hand with the information you currently have available. This will allow you to see where the information is coming from, how frequently it’s available, and how accurate it is.
3. Determine what staff, software, and processes need to be upgraded, tweaked, or utilized better to facilitate the daily collection and presentation of this information.
4. Implement the most cost-effective strategy to pull this information together in a daily report that is insightful, meaningful, and physically and intellectually accessible.
5. After the first week, evaluate the usefulness of the information as well as the efficiency of your system for generating it. You may realize you need different metrics or you can get the info more cost-effectively. Make the changes.
6. Continue to re-evaluate this reporting process and the information you get regularly to ensure it is creating as much clarity and insight as possible while efficiently and effectively being produced.
Did you win or lose today? Now you know how to get right answer, and it will make a significant difference in your business.
Ken Kaufman, Founder & CEO of CFOwise®, serves as the Chief Financial Officer for a dozen start-up, emerging, and medium-sized businesses. With almost two decades of experience and as an adjunct professor and published author, Ken focuses his professional efforts on helping entrepreneurs maximize cash flow, improve profits, and obtain clarity.