One of the watershed moments in the life and growth of a business occurs when the executives design and implement a system of business measurements. This signals the development of the business from an entrepreneurial effort to a serious organization that can exist outside of the hands-on involvement of the entrepreneur. In this article, we give you a definitive process to follow.
Why measure?
Important Benefits of Implementing Business Measurements:
1. It instills a system of organized, focused activity, often in place of the intuitive directions of the entrepreneur.
It should be perfectly aligned with the organization’s mission and vision and, therefore, provides the bridge between the ideals articulated in the mission statement and the reality of day-to-day efforts. It becomes, then, a key to growing a business. The process of building the system, which can take months, provides the bridge from an ‘individual driven” organization to a ‘systems driven’ business.
2. There is a management axiom that says, “The behavior you measure is the behavior you get.”
That remains true because it accurately comments on human nature. One proven step to organizing and focusing on our human behavior is to measure some aspect of it. Business measurements, then, are a key tool for encouraging folks to do what you want them to do.
3. It provides a powerful, proven way to free up entrepreneurial and executive time
And it ensures that they are being used in the most effective way. Once you have a measurement system in place, you can step back a bit from the fray, and look at the numbers once a month. You can then apply your time and energy to the areas of your business that are out of sync and not meeting expectations. So, in 15 – 60 minutes once a month, you’ll utilize a tool that helps you apply executive resources where they will get the best results.
Guidelines to Business Measurements
1. There are two fundamental efforts that you’ll want to measure: routine business processes, and progress on initiatives.
One routine business process may be the acquisition of new customers, for example, or, the collection of receivables. Routine business processes are the heart of business activity and should be measured constantly. These are the things that must be done, day in – day out, with ever-growing excellence, if the business is to prosper.
Initiatives are well-defined efforts to create some change in the organization and are usually rendered into step-by-step processes. For example, you may want to create a new product. You set out a process with steps along the way that will take nine months to finish. In this case, the measurements should reflect the progress and compare it to the initial plan.
2. For routine business processes think in terms of measuring results and activities.
A result is just that – an objective measurement (usually produced by a computer) of the outcome of some business process. For example, ‘total dollars of sales” is a result of a lot of effort and activity. It is easily measured and should be one of the cornerstones of a business dashboard.
Activities are the essential things that must happen that cause the result. For example, to cause the result “sales”, there must be a certain number of offers made to prospects and customers. Since, in a B2B environment, no one buys without being presented with the opportunity to buy the product (an offer) the quantity and quality of offers is a key activity that must happen if ‘sales’ are to take place.
Good measurement systems note both selected key results and the key activities that lead to those results.
3. The final number is only as valid as the means of acquiring that information. In other words, the source of the information should be as objectively verifiable as possible.
“Total dollars of sales” can be programmed in most computer systems to calculate and report each month, based on invoices created or dollars collected. On the other hand, “proposals made” may need to be collected from the salespeople.
Of the two measurements, “total dollars of sales” is more objective and, therefore, more valid. “Proposals made” relies on the salespeople accurately reporting their efforts, and, since the source is human reporting, it is not as valid. The salespeople may not keep accurate records, for example, or be tempted to fudge the numbers.
4. The measurement should not cause an undue amount of effort to garner.
For example, “total dollars of sales” should be readily available with the push of a button from a computer. On the other hand, if you didn’t have that capability, and you had to hire a temp once a month to manually add up invoices, the amount of time and effort required to measure may not be worth the value of the measurement.
Some information is too difficult and cumbersome to collect.
5. Once the measurement bug bites you, you’ll naturally tend to measure more than less. Too many numbers can be a burden on your resources and defeat one of the primary purposes of a measurement system – to focus your energy and resources on a few high-potential areas.
As you assemble your system, try to fit it into these specifications:
- No more than seven key results measurements for the company as a whole.
- No more than five activity measurements for each important area of the business:
- Sales
- Operations
- Finance
Don’t expect perfection in your first set of business measurements. It is just today’s version. You’ll find some things that are too difficult to measure, others will be relatively unimportant, still, others will rise to the surface. Creating and implementing a measurement system is a continuously evolving project.
How to Measure Routine Business Processes
Step One. Select the areas that you want to measure. Begin with the measurements of the basic results for the company as a whole and stick to no more than seven. A typical list would look like this:
- Sales
- Gross Margin
- Operational costs
- Debt
- Net income
- Cash on hand
Step Two. Select the time frame. You can, at least in theory, measure things annually, quarterly, monthly, weekly, daily, and hourly. For our purposes, we’re going to recommend a monthly time frame for every measurement.
Step Three. For each measurement, create a written definition of exactly what you are measuring. For example, “sales” can be defined as information from orders received, from invoices created, or from cash collected. Each of these is a legitimate, though different, definition of ‘sales.’ It could also be rendered in dollars, or in units i.e. “We sold $45,000,” versus “We sold 75 units.”
Be as precise as you can be. For example, your definition of sales could be: ‘The total dollar volume of invoices created from 8 am on the first day of the month through 5 PM on the last, as reported via line 32 of report XXXYYY.”
Capture these definitions so that as things change in the future (and they will) you’ll be able to compare like numbers.
Step Four. Decide who is going to be responsible for acquiring and posting the measurement, and delegate the task. As a general rule, it is better to have someone gather the numbers other than the person or team responsible for getting the results This layer of separation provides a bit more validity to the numbers.
Step Five. Create a dashboard – a summary report that lists each item with the month’s numbers. See attachment A as an example. You may want to limit the dashboard to a file on your computer system, and/or create a poster for the lunchroom, — or some other way of communicating the numbers to the rest of the company.
Step Six. Begin collecting the information.
