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Measure Your Business

Measure Your Business

Measure Your Business

What do a tape measure, a stopwatch and an income statement have in common?

They are all tools that help you measure, assess and compare results. They measure different phenomena, yet they are similar in being useful, often indispensible in making sure that processes are working, as they should, that objectives are being met and growth is occurring.

You wouldn’t hire a carpenter that didn’t use a good tape measure. You couldn’t train for the Olympic track team without a good stopwatch. Would you consider buying from a business (or buying a business) that didn’t use the appropriate tools to measure the key performance parameters of their business? Doubtful.

It is sand and unfortunate that many businesses don’t use appropriate measurement tools nor are they aware of the correct metrics to evaluate to learn if their business has a strong core. Those business owners eschew anything analytical and rely heavily on ‘gut’ ‘intuition’ and ‘experience’ can find that the fast paced every changing business environment can leave them in the dust – in a blink of the eye.

That is not to say that growing a business or even exiting a business can be conducted through metrics alone. There is a lot of judgment and often blind faith that is necessary. Just as there are business failures from not measuring key performance parameters and getting stuck in your business through lack of preparation, there are plenty of stories of businesses that failed from being too analytical, too cautious, too numbers driven.

Have you ever seen someone who works out seriously? I mean ‘six-pack’ abs, biceps, and triceps — the whole package. They have a strong core. I can tell you it doesn’t happen in one or two days of lifting weights. (Believe me – I’ve tried). Same thing happens in business. People that make decisions based on their ‘gut’ without a system for measuring or strengthening their business core find that big mistake can be made.

Working from the gut based on previous experience has some definite advantages in short cutting the decision making process. However, when confronted with a situation that is new or unique, this can be disastrous. This is a good example where having a measuring system in place provides information that can augment, support or even negate the ‘shoot from the hip’ decision.

The concept of business metrics, of measuring the key parameters that determine the success or lack thereof in your business is not new.

But are we measuring the correct items in our business? How often do we get caught using metrics that may be determinant in one business or market, but not our own?

For example, one business, company A,  may measure success by the number of SKU’s it has on the shelves of its major retail distributors. For this company, having a larger number of different products they can market not only provides additional revenue streams, but also increases the brand value and perception in the eyes of the buying public. There is a cost involved in this of course. More product development, larger supply chain, increased inventory and perhaps a tighter cash flow as inventory levels must be kept higher to a accommodate the demands of the retailers. The metric of number of SKUs is a major indicator that the business is meeting its business plan and growth strategy.

However, for another business, company B that also sells into this same retail distribution channel, using the SKU metric model could be a disaster. Concentrating on quantity versus quality could lead to the exact opposite of brand equity. For company B having a limited number of items of superior quality may actually lead to more sales, higher margins and a stronger business core. Business assets would be dedicated to a smaller, more focused product line. Inventories could be managed in a more efficient manner.

If Company B used the metric of Company A to measure their success, they may come to the wrong conclusion about the health of their business and perhaps expand too quickly or with the wrong product mix.

It is often not the obvious metric that should be used.  For certain financial metrics are useful for every business. Keeping track of cash flow, receivables, payables, debt and other financial ratios is a must. But they don’t always tell the entire story, or even the correct story.

Every business should conduct an internal audit (and for good measure utilized an outside source/advisor to get an objective external opinion) of what the core parameters that lead to success.

In a Laundromat for example, the volume of water used on a monthly basis is a direct reflection on how busy the business has been.     This metric is independent of the revenue, but is indicative of usage. It also reveals information on maintenance requirements for the equipment, return on the capital investment of the washing machines and capacity issues.

Movie studios continue to use the measurement of box office revenue as a metric. This is a very deceiving and probably incorrect metric, especially when comparing the success of movies from different periods since ticket prices continue to rise. A more accurate measurement would be the number of tickets actually sold.

In summary, measuring a business is a must. But just as critical is the understanding that correct measurement tools to use and how to evaluate and apply the results toward building a stronger business core.

For more on this subject listen to the podcast “Measure Your Business” on the Don’t Get Stuck in Your Business podcast station on download from the iTunes store, Stitcher Radio.

 

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