So you aren’t a financial wizard. That’s OK. Most business owners aren’t. In fact, there are a surprising number of successful business owners who really don’t understand how to read or use financial statements. Some of you may think your tax returns are the only financial statements you need. However, each of you has your own way to keep score and make adjustments when you see there is a problem brewing. Even those of you that may be financially savvy use many non-financial measures to keep your business on course. Interestingly, you may not consider what you are using metrics because you may be using something very informal. The point is that everyone uses metrics in and out of business on a continuous basis.
You use metrics everywhere. In some cases you watch them very closely and make decisions based on the facts and other times “you just know”. In those cases, you are still using a metric, but it is informal and made through experience. There are many metrics you and your employees “just know”. The trick is to try to identify the ones that can make a (big) positive impact on the rest of your business and formalize them so the rest of your organization can use them where they fit. They don’t have to be financial, and the further you get away from top management, sales and accounting, the more likely you are using measures that are non-financial. Even those areas of your company have many non-financial metrics they can and should be using.
Every industry uses a standard set of Key Performance Indicators or “KPI’s”. Some are financial, some are process and some are industry benchmarks. Every company should use business KPI’s of some sort that makes sense for you. Unfortunately smaller less sophisticated or informally run businesses generally don’t. Those companies pay a price as a result. They spend more time reacting to problems as they present themselves, fixing symptoms, creating work-arounds, paying premium prices for goods and services, building unnecessary inventory levels and so on.
At the same time, some very large or sophisticated businesses also miss the power of metrics as they may equate everything to dollars or measure everything they can find. This also wastes time as meaningless data must be collected, analyzed and put into a format that is potentially useful. As a result the information may not be in a usable format for their employees to understand and act on, or equally wasteful, having their employees collect meaningless data in the first place.
To be sure, in the end everything gets measured from a financial basis. But as you get closer to the production of your product or service your employees are not likely to be able to equate dollars produced to their day-to-day jobs. A programmer may relate better to lines of code written, a landscaper, repair or maintenance person may better relate to time on a job and a production worker would relate much better to units produced.
All are valid metrics and can be equated to dollars at the management level when goals are added to the evaluation. Having schedules and expectations to measure against are as important as the measures themselves. It isn’t hard to start. As a stake in the ground I generally have my clients start by using their prior years actual (if the information exists), or what their expectations are for a particular time period. Maybe it is a contract deadline or X number of jobs promised for that day. Keep it simple.
As you move forward you will learn from your metrics. You will learn how to anticipate. You will learn how to schedule better. You will learn to identify when the train starts to leave the tracks. Most of all you will learn discipline and how to use facts to manage your business.
Not only will you learn, but your employees will learn as well. If you provide them with metrics they can understand and relate to they will help you. It will become their scoreboard; something to look forward to (if you are not using it for them to try to achieve unrealistic goals). They will be able to help provide solutions so you can all succeed. They will become part of the correction and improvement process. Most of all your company’s productivity and moral will increase as goals are met and exceeded.
What about the informal metrics I spoke about earlier? I always recommend to my clients to be inquisitive. Any experienced worker has some sort of internal measure they have used to measure their own success throughout their career. If you have a particularly successful manager, supervisor or worker than their peers, ask how they know. You may find a valuable metric or business KPI that your organization can benefit from. Why not use it?
At the end of the day, no business can be successful without using some sort of metrics to measure their progress. Non-financial metrics are as important in day-to-day business success as the end of the month financial metrics used to gauge business success. Metrics can be very powerful regardless of how large or sophisticated you are. The beauty is the simplicity. Metrics can be found for any job in any size company. Use them to your advantage. Your biggest competitors are.
Need help getting started or creating a dashboard of KPI’s? Our team of experts understand and know how to help you find the metrics that will make the most sense for you and your business. Call us today!