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Your Key Performance Indicators & How You Measure Business Success

Pillar One Your Key Performance Indicators & How You Measure Business Success

This is a big category. here are links to the other pages – page 23456 – 7

What’s Stopping Your Business From Making More Money?

As an entrepreneur, you probably suffer from what Michael Gerber calls “busy, busy, busy”.

There’s always much more you which you could do…, should do.

But what really matters?

What is the main thing that is stopping your business from making more money?It’s an interesting question and it explains why I’m attracted to using the theory of constraints in my strategy coaching.

There are two techniques in particular from the Theory of Constraints Thinking Processes that we should talk about.

The first is the Prerequisite Tree.

This focuses your attention on the necessary conditions to meet your goal.

It’s particularly important for start-up businesses or those that have never performed well.

The idea is to focus on the individual things necessary for your success which together become sufficient.

It’s a bit like a jigsaw puzzle – you don’t get to see the full effect until every piece is in place.

But the jigsaw has been mixed in with other sets of pieces.

There are many things competing for your attention, but they don’t fit.

They don’t complete the picture.

The 1,001 other things you could do in your business take your time, attention and money but because they are nice to haves rather than must haves, they move you forward.

The Prerequisite Tree identifies the most important things to focus on and turns them into intermediate objectives.

We can find the items by asking “What’s stopping you from achieving your goal? Why haven’t you already done it?

The second important aspect of the Theory of Constraints Thinking Processes I want to focus on in this blog is the Current Reality Tree.

This works from the symptoms of your problems – perhaps not making enough money – and working back helps us to identify the core problem which will have maximum impact.

This is identifying the constraint.

And when you can see it, you can follow the Theory of Constraints principles and do something about it.

The constraint may be inside the business.

It may genuinely be a physical constraint – you could sell much more if only you could make it.

Or it could be a policy constraint. Unfortunately it is easy to get trapped by conventional thinking and do things because “that’s the way we’ve always done them” without appreciating the consequences.

Or the constraint could be out there in the market.

You could make more money if only you could sell more.

The Theory of Constraints has an answer for that too by developing what’s called an unrefusable offer or even a Mafia offer (think Marlon Brando saying “I’m going to make you an offer you called refuse” in The Godfather”).

This is the purpose of differentiating your business and explains my interest in the Theory of Constraints and the work of Eli Goldratt.

I recommend you take a look at this excellent book

The Logical Thinking Processes by William Dettmer

in 1 – Your KPI, 2 – Your Inner Game

Balanced Scorecard As A Performance Measurement System

The Balanced Scorecard is the most famous of the performance measurement systems that can be used to implement and monitor a new strategy or group.

What Is The Balanced Scorecard

The Balanced Scorecard is a short summary report of the key performance measures of a business, both financial and non-financial.

It tells the story of what the business is trying to achieve through its business strategy and how well it is succeeding in its implementation.

The Origins Of The Balanced Scorecard

Like many others who were using a broad mixture of measures to monitor performance in business in the late eighties and early nineties to overcome the shortcomings of traditional financial performance reporting (like driving by looking through the rear view mirror) I was astonished by how the idea of the balanced Scorecard caught fire as a bold, new concept.

Wikipedia reports that the first balanced scorecard was created by Art Schneiderman (an independent consultant specialising in the management of processes) in 1987 at Analog Devices, a semi-conductor company in the USA.

He shared his ideas with Robert Kaplan and David Norton and it became the basis for two popular articles in the Harvard Business Review and then a successful book.

  • “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, Feb. 1992
  • “Putting the Balanced Scorecard to Work”, Harvard Business Review, Sept. 1993
  • “The Balanced Scorecard: Translating Strategy into Action”  (1996)

Since then, Kaplan and Norton have extended the balance scorecard system with more books

  • The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2000)
  • Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004)
  • Alignment: How to Apply the Balanced Scorecard to Corporate Strategy (2006)

Before I go deeper into the Balanced Scorecard, let’s just step back and think about performance measurement as a general topic.

Introduction To Performance Measurement

“What gets measured gets done” may be a cliché but given the problems of implementing strategies it highlights the need to link performance measures with the developed strategy.

A performance measure has three key aspects:

  • It communicates to staff that performance in the chosen area is important.
  • It indicates the level of performance being achieved.
  • It provides a benchmark and target for improvement efforts.

Establishing a measure allows the four basic performance management questions to be asked:

  • What has happened?
  • Why has it happened?
  • Is it going to continue?
  • What can we do about it?

Traditional Performance Measures

Financial performance measurements often dominate the formal reporting in a business with the monthly management accounts and performance weekly or daily financial summaries.

But these are essentially looking backwards at the effects of past decisions rather than looking at whether the business is building the necessary capabilities for future success.

Financial forecasts of the future help because they focus attention on what may happen, but they are not the full answer for an effective performance measurement system.

Other non-financial information may be produced and distributed in the business but often there is little link between the different performance areas and the overall financial position of the business.

Sometimes there is a proliferation of measures with the inevitable confusion. Here the problem is not having performance measures but having too many.

The Balanced Scorecard

The concept of the scorecard developed by Kaplan and Norton has been heavily publicised and promoted and it became another management fad to use and abuse. That undermines the contribution that a well-designed balanced scorecard can have in a business.

The Four Perspectives In The Balanced Scorecard

The idea of the balanced scorecard is to look at a limited number of measures that are balanced across four perspectives.

  • Financial – how does the company look to its shareholders?
  • Customer – how does the company look to the customer?
  • Internal Process – is the company developing its internal processes to deliver the necessary performance for shareholders and customers?
  • Learning and growth – is the company developing a capacity to develop the future?

Balanced Scorecard Performance Measurement System

The key aspect is that the measures in each of the perspectives must be linked by the business strategy in a unique series of cause and effect relationships. For example;

  • We will make a profit because customers will buy sufficient quantity at a fair price and margin.
  • Targeted customers will buy because the value we provide exceeds the price and the relative value offered from competitors.
  • We are able to deliver that value because we excel at the necessary efficient internal processes.
  • We will survive any attempts by our competitors to copy our advantage by continuing to innovate.

The scoreboard effectively tells the story of the strategy and its implementation. I like this Theory Z scorecard example from the old Halifax Bank in the UK.

After allowing for time-lags, performance in the balanced scorecard indicates whether the strategy is valid.

Different Measures For Different Functions And Levels

The scorecard is intended to give a top-level picture of the company’s current and intended performance across each of the four perspectives but it is essential that the objectives built in to the scorecard are cascaded down through the business.

The ultimate aim is for each person or team to have a series of objectives and measures that encourage everyone to act in a way consistent with the overall business strategy.

More Information About The Balanced Scorecard

At some stage I will be reviewing the books I’ve read on the balanced scorecard and the other performance measurement systems.

Have You Used A Balanced Scorecard?

If your business has developed a balanced scorecard or another performance measurement system to help you to implement your strategy I’m very interested to hear about your experiences.

Please leave a comment.

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How To Cope With Financial Stress As A Business Owner

2020 has been a brutal year for the world economies and small businesses in particular. The Covid-19 pandemic appeared without warning and caused many businesses to plunge into a crisis.

Things aren’t getting easier and that means more business owners and entrepreneurs are suffering from financial stress.

No Wonder Small Business Owners Suffer From Financial Stress

The leisure industry is being decimated and the high street retailers are suffering too. Many service businesses involve close personal contact and these have been badly affected as well.
[continue reading…]

in 1 – Your KPI, 2 – Your Inner Game, Business Problems And Mistakes

Small Business Financial Management by Ivan Houston

The full title of this book by Ivan Houston is

Small Business Financial Management: How to organise and manage the finances in your small business

In my review posted on Amazon.co.uk, I gave the book a 4 Stars rating. This means it is Good to Very Good.

Here is my book review.

Helpful but I’m not sure it has the right title

I’ve been looking for a good book on financial management to recommend to clients. My all-time favourite is called “The Genghis Khan Guide to Business” but it’s been out of print for a long time. Occasionally second hand copies pop up for sale on Amazon.

For my purposes, this starts at too low a level but I think anyone thinking about starting a business will find it very helpful.

Reading the book, it is very clear that the author works in the accounting profession rather than as a financial manager/ director in industry and commerce. There is a surprisingly big difference in perspective.

I split it into three roles
1) book-keeping – that is recording financial transactions
2) accounting – the reporting of financial transactions and hopefully forecasting future results.
3) financial management – which for me is being involved or even making the decisions that directly contribute to the financial health of the business.

There isn’t enough content in that third category.

I like the book but it isn’t what I was looking for or expecting based on the title. I recommend it for new business owners.

You can buy the book from Amazon.co.uk or Amazon.com


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in 1 – Your KPI, Best Business Books

Calculating Moving Annual Break Even Statistics

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

Monitoring Your Break Even Point Each Month

If your business has been losing money or you’re actively in a business turnaround process, I believe it’s important to calculate your break even point with each set of monthly management accounts.

You can do it on a month by month basis but, like a lot of financial statistics, it can go up and down and make it hard to see the trend.

Using Moving Annual Calculations

One option I like in practice is a calculate moving annual statistic for Break Even Points, partly because it’s normal to think in terms of performance in a year. [continue reading…]

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What If Analysis – Cost Volume Profit

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

Understand The Financial Implications Of Your Decisions With What-If Analysis using the Cost Volume Profit Relationships

If you’ve worked your way this this Pillar 1 Module 3 systematically, then with what you know so far, you can start to look at the financial implications of some quite complex decisions.

Previously you’d rely on gut feel to make and worry about the possible consequences.

Now you can start looking at the facts and key assumptions and make a considered judgement, just like senior managers do in big businesses with full accounting and financial management support teams. [continue reading…]

in 1 – Your KPI

Reducing Costs

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How To Reduce Your Costs To Improve Profitability

Look At The Detailed List Of Your Costs

First, if you want to reduce your costs, you need to know what you spend. It’s very hard to think about challenging your cost base when you’re doing it as a way of abstract thinking.

Your accountant or your computer system probably provides a detailed break down so take a look at it and challenge the big numbers first.

Seeing how the level of costs compare can be a big eye-opener. It’s very easy to agree to increase costs – an extra person, a salary increase, a price increase from a supplier or a new discretionary cost. [continue reading…]

in 1 – Your KPI

Your Profit Target Point

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

Use The Cost Volume Profit Model To Target Your Ideal Profit

You can use the same Break Even Point logic to target the Profit you want, by treating your profit target as a fixed cost.

Then you can calculate the sales needed to reach your target at your contribution rate assumption. [continue reading…]

in 1 – Your KPI

Three Ways To Make More Profit (Accountants)

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How Accountants Tell You How To Increase Profit using The Cost Volume Profit / Break Even Analysis Model

The break even point model (numbers example link) makes it clear there are only three ways to make more profit.

The first way is you can sell more

We have already seen the impact of that in our numbers example. [continue reading…]

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Calculating The Break Even Point

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How To Calculate The Break Even Point

When I set the example (link), I didn’t need to calculate lots of different numbers to find the break even point.

There is a simple formula provided you know details about the fixed costs and the contribution. [continue reading…]

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