Pillar 1 Your Key Numbers – What’s It All About?
Pillar 1 “Your Key Numbers” is concerned with establishing where you are in your business, both now and at every stage through your improvement process.
Why Performance Measurement Is Important
In the performance measurement world there are two popular phrases which will help you think about this essential area which is not done well by many of the small businesses I encounter.
- “If you don’t measure it, you can’t manage it.”
- “What gets measured, gets done.”
Measuring performance is not “busy work” or at least it isn’t when it is done well and the measures are used to:
- Inform you about what is happening;
- Motivate your team; and to
- Change actions and decisions.
An effective performance measurement system makes a huge difference to the way you manage your business.
When you have an effective measurement system, you are able to manage on fact and not your gut feel.
It allows you to identify and correct problems early or to see opportunities which you can take greater advantage from.
So What Should You Measure?
Basically you need to combine two time periods.
Looking Back At What Has Happened
Your accounts will show you what has happened which is important as your accounts will show overall performance levels and can reveal problems and important trends.
But you can’t change the past, just learn from it – both the good and the bad.
You also need to find indicators which tell you what will happen in the future.
For example, your accounts will show you how much you sold.
Very nice if it is more than you expected but it is history and doesn’t indicate what you will sell tomorrow, next week or next month. Perhaps you can assume things will carry on as they have been but perhaps you can’t.
Looking Forward To What Will Happen
Your order book, or an assessment of your sales pipeline (based on enquiries and how well they are progressing) gives you an indication of what will happen in the future.
If you monitor leads and enquiries coming into your business, you can see the trends:
- Are the number of leads increasing or decreasing? Is the value increasing? Is the margin on those orders increasing or has a price cut had an bigger than expected effect?
- Is your lead conversion rate getting better or worse? Is a new marketing method producing too many unqualified needs and wasting too much time of your sales force?
- Is the time taken between enquiry and order getting longer or shorter?
Depending on the answers, you will see where action needs to be taken.
This way you start managing for profit by managing the drivers of your profit.
Identifying the key factors which drive your performance and understanding how they fit together will make a big difference to your profits and your approach to business when it leads you take action.
Profit is something you make happen and not the happy result when your accountant crunches all the numbers at the end of the year.
A Business Without Measures Is Like Playing Golf Without Keeping Score
Imagine playing golf with an evenly matched rival – with a big bet of $10,000 at stake together with a huge dollop of pride.
Winner takes it all.
Imagine a situation where your competitor keeps score but you don’t.
He changes his approach depending on the state of the game, playing safe at times and taking risks at other times.
But you can’t do that because you don’t know if you are winning or losing.
Your competitor is able to change his strategy and tactics based on the situation of the game. You just trust to luck.
Who do you think is most likely to win the golf match?
It is the same in business.
Your performance measurement system means you can manage for profit.
This training from my old membership website, Your Profit Club, has a series of modules on how you can measure and understand your business performance so that you can manage for profit and cash.
P1M3 How Profit Is Calculated
P1M4 Four Ways To Increase Profit
P1M5 Your Profit Drivers
P1M6 From Profit To Cash Flow
P1M7 Other Performance Measures