By John Swinehart, The Controllership Group, Inc. - Times are good? Times are bad? Either way, many small business owners suffer from “head-in-the-sand” syndrome…hoping the good times will never go away and wishing the bad times will.
If you operate based on “gut instinct,” alone or you make assumptions on how your business is performing without knowing the facts, you can run into problems quickly. Fortunately, there is a simple process you can perform to help you keep an objective view. By monitoring a few key business metrics, you can quickly gain a handle on your business and start on the path to improving your profitability.
What Are Business Metrics?
Business Metrics are simply measurements of your business activity. They are not only tools for the bookkeeper, office statistician and bean-counter. In today’s increasingly flooded marketplace, your mantra must be: “You can’t manage it if you can’t measure it.” A business metric is any type of measurement used to gauge some quantifiable component of a company’s performance, such as return on investment (ROI), debt to equity (D:E), employee and customer churn rates (churn), revenues, earnings before interest and depreciation/amortization (EBITDA), and so on.
By defining the metrics that are important to your business and monitoring them closely, you gain three key benefits:
Focus. Defining the metrics that are most important to your business allows you to tune out everything that isn’t related to those key measurements. As a result, you’ll find that you and your business are much more efficient.
Insight. Companies that monitor metrics can spot threats and opportunities faster than companies that don’t. Your metrics will give you keen insights into what’s happening within the four walls of your business and they can be compared to overall trends in your industry.
Better Decisions. Metrics provide a framework for making business decisions. With objective looks at your numbers, you can make well-reasoned decisions on how to proceed. If it improves your key metrics, consider it. If not, move on.
Implementing Metrics Getting started with metrics is easier than you might think. Many small business owners don’t understand how simple it can be to collect and analyze these important numbers. A simple seven-step process will get you started.
Define Your Goals. Make a list of business goals. Goals might include sales objectives, target profit margins, or success at signing up new customers.
Define the Metrics. For each business goal on your list, write down a metric that will help you track your progress to success. For example, if your goal is signing up new customers, your metric might involve stating the number of meetings you will have per week with perspective customers.
Benchmark Current Status. Now that you established your metrics, you need to measure them. You must determine exactly how your business is doing, even if the truth is hard to swallow. By establishing the current value of each metric, you will be able to track your improvements in the future.
Put in Place a System to Monitor and Report Metrics. You may need to add new business processes that will help you calculate and report your metrics. For example, is the number of your customers who view your customer service as being “excellent,” then you may want to survey your customers every month and ask them how you are doing.
Communicate Metrics with Employees. Once you’ve defined the key metrics that are important to your business, be sure to let your staff know. Then, everyone can make decisions that help improve the metrics.
Review the Metrics and Make Decisions. With your metrics in place, you have greater insight into which strategies work and which don’t. Review the metrics and take steps to improve your results.
Promote Successes. When your metrics improve, let your staff know and reward everybody that helped make things better.
Metrics Best Practices As you move towards using business metrics to manage and improve your business, follow these suggestions:
- Keep it simple! If you try to monitor too many metrics you may end up concentrating on none of them.
- Choose a frequency of measurement. Once a year is probably too long of a period to get the information in time to take the necessary corrective actions.
- Reevaluate your metrics periodically. Your business priorities can change over time, and your metrics will need to be modified accordingly.
Get Started Put aside a couple hours to get started with your business metrics initiative. Decide what metrics you need, do some initial benchmarking and get started. Remember what you don’t know can hurt you.
John is affiliated with The Controllership Group. His firm provides outsourced accounting services to business owners, including bookkeeping, tax, controller and CFO level services. He can be reached at 317-572-1231 or johns@thecontrollershipgroup.com
