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 common mistake, most small businesses make is measuring their business performance by focusing solely on the bottom line.
For most small businesses, there are four ways to grow the business: 1) increase the number of customers who deal with you; 2) increase the number of times they buy from you; 3) increase their average transaction value; and 4) make your business processes more efficient and effective. However, the small business owner can easily lose sight of these ‘growth strategies’ when they are consumed with managing daily activities, but these are the very things that will translate into a profitable bottom line.
While the bottom line is an excellent measurement of financial success, it provides only historical information (a lagging indicator) and often masks other factors 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.
Understanding the Profit Equation
In business, the score is kept in profits, how much money are you making after taxes. The system of accounting provides the rules for keeping score. It uses dollars as the basic score. Certain basic financial reports are used to present the score — the balance sheet, statement of cash flow, and profit and loss statement, on a month, quarterly and annual basis.
Traditional thinking says that when it comes to measuring profit, you generally look at it this way: Revenue – Expenses = Profit. However, this method fails to measure Lost Opportunity.
What is lost opportunity? First, Business has people performing activities each day. The lost opportunity lies in not measuring, managing and leveraging those activities on a real-time basis.
Management Fact, your company profitability depends on how well your people consistently perform specific activities. Thus the profit equation links: traditional financial measurement (Revenue – Expenses = Profit) and Key performance indicators (KPIs) People X Process = Profit.
Owners, the game of Football has 3 levels of scoring 1) Touchdowns, 2) Offense/Defense (special teams) and 3) individual performance. In business there are 3 corresponding levels of scoring 1) Profit/Loss, 2) Activity/Profit Centers and 3) employees performance.
In football, performance is measured, and compensation is based on 3 levels of scoring. 1) How the team performs as a whole 2) How the special teams performs, 3) and how each individual performs.
The head coach receives accurate information from the offensive and defensive coordinators in the press box; he is then empowered to adjust the team strategy during the game. The result is, each player and each team group (offense, defense, special teams) understands exactly what is expected of them each play of the game. dafabet
Unfortunately, most employees don’t know what the “rules of the game” are, and do not know how they are being scored.
It’s no wonder many small business owners become frustrated with the performance of their team.
Management Fact, people perform best when they understand the ‘rules of play’ and the scoring method is clear.
Measurement drives performance
Within every business there is a string of activities that drive its success. Once identified, you can build measurements around those factors, and 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 key is to measure, manage and improve these areas of performance on a real-time basis.
Management Fact, small incremental changes in key areas (activities) can have a big effect on the bottom line.
The 4 key areas to be measured in your business are:
Marketing and Sales
Within each area there are Key Performance Indicators (KPIs) that should be measured and monitored. There are many potential KPIs to be monitored. Since each business is unique, the first step is to identify KPIs specific to your company from the customer’s perspective. It is important that you capture your customer cycle of interaction (KPIs must be associated with each point of contact with the customer).