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Even the most profitable companies are always looking for ways to get better. When looking at a business, there are many ways to measure its success. A mistake that many make when measuring business performance is to focus solely on the bottom line.
While your bottom line is an excellent measurement of financial success, it only provides historical information (a lagging indicator) and really masks the various components that contribute to your company’s profitability. By measuring and managing other key performance areas, you can transform a reactionary management approach into a proactive, real-time process that drives business success.
Traditional thinking says that when it comes to measuring profit, you generally look at it this way: Revenue - Expenses = Profit.
However, when it comes to improving profit, you have to look at it somewhat differently. You need to look deeper into the activities that generate your revenue and drive your expenses. In general, People x Process = Profit. Revenue and expenses are a function of people’s behaviour as they operate within your company’s processes. The key to business success lies in consistently leveraging both your people and your process to maximize the results you achieve.
There are really only four ways to grow your business. You can increase the number of good customers who deal with you, increase the number of times they buy from you, increase their average transaction value, and make your business processes more efficient and effective. Yet, it is amazing how few business owners actually know how many customers they have, or what their average transaction value is. Many owners have little time to worry about making their systems and procedures more efficient, as they are consumed with managing daily activities. But these are the very things that will translate into a profitable bottom line.
You understand your business better than anyone else. But within every business there is a string of activities that drive its success. You cannot manage your bottom line without managing your people effectively and the business processes that create it.
It all comes down to People x Process = Profit. There are activities that are critical to the performance of your company. These activities can be measured and leveraged. By thinking about what is critical to your business, and by building measurements around those factors, you can monitor how you are doing as you go. You create “leading indicators” that will keep your business on track to a profitable bottom line.
The lost opportunity lies in not measuring, managing and leveraging these areas of performance on a real-time basis. Once you have all the information you need to make critical decisions about your business, you can effect small, incremental changes in key areas or activities that will have profound effects on the bottom line. The idea is not to just make one thing 100% better, but to make 100 things just 1% better.
Mentor Plus Performance Measurement specialists advocate that a simple approach of measuring the following indicators is a first step in the right direction:
1. Customer Attrition Rate
2. Customer Acquisition Rate
3. Average Sale
4. Frequency of Contact
5. Cost of Goods and Overhead
These indicators are a good starting point toward a balanced perspective on the company’s performance.
Much of the data you need to track these key indicators is likely already available to you. By simply setting up a “flash report” (a scoreboard of critical business measurements) you can provide yourself a guide for making day-to-day management decisions. Keep in mind that what you can measure, you can manage. By applying key measurements to your business, you will have the information you need to manage your company more effectively, empower your staff and grow your profits, and be well on your way to taking care of business.
By Wendy Lewis, CA. Published in the Comox-Valley Record. For more information, please contact your local MNP advisor or Wendy at 250.338.5464.
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