June 1, 2017
The ‘Gold’ is in the numbers
“Understanding your numbers in business is essential to your success!” While this statement rings true and is simple, it often elevates stress levels in most entrepreneurs I work with. Yet, if you study successful and fast growing businesses, the leaders all have a handle on the key metrics of the business.
I believe the heart of strategic business decision making is data, irrespective of the size of your business. Data can provide insights that help you answer your key business questions (such as, ‘Is my marketing effective?’ ‘How can we improve customer satisfaction?’ ‘How many leads do we need to meet our sales quota?) Data leads to insights; business owners and managers can turn those insights into decisions and actions that improve the business. This is the power of data.
This reminds me of a famous quote by Peter Drucker that says, “If you can’t measure it, you can’t improve it”. Think about it, if you can’t measure something, and know the results, you can’t possibly get better at it. A simple example is if you are trying to lose weight – if you don’t step on the scales, how will you know if you are succeeding or failing?
Now when I talk about the numbers I’m not referring only to your financial numbers (ie revenue, expenses, profit) I am referring to all data in your business. You see all the activity in the major areas of your business lead to a positive or negative result in the financial data. You need to choose which Key Performance Indicators (KPIs) you are going to track and then create a simple system to review these numbers consistently.
You also need to ensure you are measuring a combination of leading measures and lagging measures. Leading measures are like inputs, they measure the activities necessary to achieve your goals. As the name implies, these indicators lead to results, they come first. Leading indicators can be hard to measure, but they’re easy to directly influence and describe how to achieve your goals.
Lagging measures are like outputs, they measure the actual results. Lagging indicators show the final score of your strategy and/or efforts. These metrics are easy to measure, but hard to directly improve. Most likely, your primary KPI – where you’re going – falls into this category.
What you need is a dashboard. An effective dashboard can serve many purposes. It can:
• Help business owners define what is important
• Educate people in the organisation about the things that matter
• Set goals and expectations for specific individuals or groups
• Help business owners sleep at night because they know what’s going on
• Encourage specific actions in a timely manner
• Highlight exceptions and provide alerts when problems occur
• Communicate progress and success
• Provide a common interface for interacting with and analysing important business data
Here are some numbers I recommend you include on your dashboard:
• Gross profit
• Fixed costs
• Net profit
• Accounts receivable (debtors)
• Debtor days (debtors/revenue x 365)
• Inventory days (inventory/COGS x 365)
• Accounts payable
• Cash flow
• Lead response time
• Open opportunities $$$
• Conversion – multiple levels
• Quotes/proposals sent
• Lead quality
• Closed sales
• Average sale $$$
• Cost per sale
Key customer metrics
• Net promoter score (NPS)
• Customer retention rate
• Customer profitability score
• Customer lifetime value
• Customer turnover rate
• Customer engagement
• Customer complaints
Key employee metrics
• Revenue per employee
• Employee satisfaction index
• Employee engagement level
• Employee churn rate
• Average employee tenure
• 360-degree feedback score
• Time to hire
• Time to train
• Training return on investment
Long and short is start with a few key metrics that you measure – ask yourself if they provide enough information for you to make strategic decisions – if yes then you are reviewing the correct numbers, if no then add the numbers you need to make strategic decisions and add these to your dashboard. Start now and watch the improvements.