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Business metrics

Why you should take the time to measure performance

Keep track of your goals

As a small business owner, you can't underestimate the importance of tracking the progress of your business. It's very easy in the rush of hard work to forget to take time out for planning. In the long run you'll be more profitable and your business will run more smoothly if you take a couple of hours each month to assess how well you're doing and decide what you need to do next to stay on track.

In fact, one recent business survey showed that 89% of small businesses that grew reliably for more than three years had in place well developed methods of tracking their business goals related to growth, income, expenses, etc.

This article discusses how to build a framework of business metrics - measurable activities and achievements which will point the way forward. Business experts often call these KPI's: Key Performance Indicators.

Why plan ahead?

Developing business metrics and measuring results against them will offer you several benefits.

For one thing, they will help outline a clear business path for a company. In every business, circumstances change, and it's tempting to react impulsively or emotionally. With the numbers in black and white, you can make a more rational decision on how to proceed. Here are some examples:

Short-term setback: A competitor cuts their prices

Long-term development: New technology changes the way you offer your service

Change in your strategy: You decide to offer a new enhancement to your service

Moreover, a key trait of successful businesses is their sensitivity towards metrics and analytics that might indicate problems. Quite simply, companies which watch trends spot both problems and opportunities first. Metrics such as the "industry sector growth rate" offer you a perspective on your industry and will therefore inform decisions you make about your own growth. Monitoring and acting appropriately to changes in business metrics holds the key to the consistent growth and success of your business.

You can generate reports on plenty of KPIs yourself. You should already be keeping track of sales and expenses each month, but growing companies should also consider other important metrics. Are customers spending more than they were a year ago? Are you getting business from your chosen target sectors? If you're tendering for work, what percentage of tenders are successful? Are your profit margins increasing or decreasing? Other industry data might have to come from outside your company - trade associations may be able to help you here. Many small business accounting software packages are available that enable you to obtain these metrics easily. Most of them also allow you to export data to Microsoft Excel, which is a powerful tool for tying business goals to metrics.

Create an analytical framework

Your framework starts with establishing business goals. These goals may include sales targets, ideal profit margins, or success at signing up new customers. One useful thing is to go through a budgeting exercise for your business. This exercise forces you to answer questions such as:

How much can my business realistically grow based on current conditions?

What aspects of my business have the most impact on my bottom line?

What are the pain points that affect the bottom line?

Where are the growth opportunities?

How can I reduce the cost of acquiring new customers?

Where can I cut costs?

A SWOT (Strength, Weaknesses, Opportunities and Threats) analysis will also help you honestly assess your business compared to its competitors.

This exercise can form the basis for setting measurable, actionable, results-oriented goals:

For example, let's say a particular business, Pipeline Plumbers, performs a SWOT analysis which shows that plumbing inventory shrinkage (breakages, theft, loss, etc.) is too high. It resolves to cut these losses by 20%.

The business then decides to break down the goal into objectives, and comes up with a suitable strategy: they will implement a software-based inventory management system. They will track the progress of the new inventory system towards achieving the goal of reducing inventory shrinkage by 20%.

The key metrics to track the goal each month would be: current inventory shrinkage per month (without the inventory software in place), percentage of inventory managed by the new system and the shrinkage for inventory managed by the software system.

The business now has greater insight into what strategy is working and what isn't. Pipeline Plumbers now also has a greater chance of fixing problems midway in the process.

There's another metrics example here.

Break down the goals into measurable metrics

A second step in developing your business metrics involves breaking down your goals into action items that can be easily tracked. Although an obvious step, this is where most businesses falter. Even companies which set goals can forget to carry through the process with effective monitoring. You'll need to come up with the metrics that match your goals and show the way forward. These metrics may be derived from several data sources.

Exporting data to Microsoft Excel and doing the analysis there is particularly effective - you can set up a workbook that tracks all your goals in one place, and present them in the same way each month.

Investing time in critically figuring out what metrics are necessary, versus those that are nice to have, can improve the overall efficiency of the analytics framework.

Know when to measure, and when to change the yardstick

Metrics need to be classified according to how frequently they are monitored. Cashflow metrics, for instance, may require daily monitoring, while a collection rate may need to be monitored monthly. It is also helpful to spend time defining what values for certain metrics indicate a problem in the business model. This is how agile companies spot problems early on.

Return on investment

Although all this may sound a little overwhelming at first, the benefits will significantly outweigh the time you invest. You may also be fearful of finding out shortcomings in your company, but be assured that it's far better to know and act on problems than to brush them under the carpet. In the long run, effective planning will make your day-to-day work easier as you establish clear rules for many aspects of running your business such as controlling your cashflow. You'll actually have to make fewer hard decisions, not more; and you'll make them without the confusion of information overload. Effective goal tracking is the difference between a responsive organisation and one which is shooting in the dark.

What next?

Put aside a couple of hours, and examine your business plan. If you wrote one when you first started your business, you might be surprised how much things have changed in a matter of weeks. It's time to plan for the future again, so add these to your to do list:

Establish some goals. You might want more customers, perhaps you need to reduce costs, or you may need to take on staff to sort out delivery problems. It might even be as simple as a plan to change suppliers.

Decide what metrics you need to assess whether you're on track to achieve your goals. Where is the information going to come from, and how will you get it? What benchmarks will flag up success or problems?

Finally, how often will you come back and look at your progress? For many smaller businesses, once a month is enough. Plan to take time out at suitable intervals - and then stick to it.

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