Good Management Information is the Key to Better Business Performance
Can you answer any of the following questions about your business?
1. What single item in your business has the biggest impact on your cash flow?
2. Which one of your products or services contributes the most to the bottom line?
3. What is the value of your business?
4. What is the maximum sales growth that your business can realistically sustain in the coming 12 months?
It is important that fundamental questions like these can be readily answered. If you are confident you can answer these questions then you have an appreciation of the critical financial relationships that impact on your business. As a consequence you are in a much better position to make proactive decisions which can improve your business performance and lead to better cash flows, increased profits, increased business value and a better return on your money.
Because of economic pressures and time constraints, many business owners and managers are forced to think in the autopilot and often resort to running on gut feel. They don’t take the time to undertake detailed analysis of their businesses financial performance. Inevitably this can lead to poor decision making. You need to be able to answer the questions above and understand what the consequences of the answers mean to your business.
Photo: - Brenda Starr
The one main number is not found in the financials.
Businesses are used to collecting the financial information and with their accountants compiling financial reports. But the one main number that is driving the business is not found in the financials. The one main number that will predict where the future of the business is going is not in the financial data.
Because we are measuring the accounting data it is easy to be tempted to use this information to lead and manage the business. The accounting data though is a history statement and is useful to review but you will never find the engine of the business in these statements.
The one main number will be found in the operations. The operations of the business drive the future of the business. But be careful. It is imperative that we understand what is important to the customer to determine the engine of the business.
A great example from a few years ago is Contintental Airlines from 1997. Gordon Bethune became the CEO the airline had as the one main number as :- cost per airline mile. Now whilst this significantly impacts on the bottom line it is not what the customer sees as important. It lead to behaviour to reduce the quality of meals, fittings etc. Gordon changed this to :- on time arrivals. This changed the focus to something that the customer value. The airline went from worst to first.
The one main number was in the operations. Importantly though it was what the customer see as valuable.
KPI’s are not just financial measures.
To be effective KPI’s can not just be composed of financial metrics. Metrics derived from the financial statements have a place but they need to be complemented with other measures that are derived from a true understanding of what is important to the customer.
The financial statements are records of history. Thus financial metrics also reflect what has happened. They are not in any way predictive of what is to come. Financial measures have important uses including cashflow management, efficiency, productive use of resources. But financial measure must not dominate the KPI’s as the focus will be distracted from delivering value to the customers.
We need to focus on what is success in the eye of the customer not just past profitability.
The first step in this process is to have a complete understanding of the customer and what they value. A business must invest the time and effort to be armed with the facts and data on the customer. From this the business needs to ask the customer and to observe their behaviour to get the understanding of what is important to the customer. Once this information is to hand then indicators that measure this value delivery can be designed and implemented.
The key measure of this post is not just have financial metrics as KPI’s.
5 Reasons why businesses end up with poor KPI’s
Unfortunately performance measures or KPI’s can get a bad impression because the prevalence of some terrible KPI’s in many businesses. The phrase “what you can measure you can manage” which came originally out of a McKinsey strategy has been belittled by many. I am not saying that you can measure everything (that is for another post). The failure of KPI’s and perception that has been generated I believe has come about from poor implementation of performance measurement.
The reasons that business have poor KPI’s include:-
- They do not exactly know what is success in the eye of the customer. We must start with the customer to know what we should be focusing on measuring and tracking.
- Lack of a complete understanding of the operational drivers of the business success.
- Having KPI’s that are at odds with each other. For instance if there is a KPI on customer value delivered and then a KPI on employee productivity then there can be a tension as to which one is the most important.
- Too many KPI’s. Some businesses I have encountered have had more than 50 KPI’s at senior management level. This just means that none of them will be focused on.
- The design of the KPI has been delegated a low level person in the finance department. The KPI’s are too important not to designed by CFO or senior management.
I am sure that there are many other reasons why inappropriate performance measures end up being designed and implemented however these are five I have seen to0 often.
Your thoughts please.
5 Reasons why businesses don’t have performance measures
There are many reasons given by business owners for why they don’t have performance measures. In this post I have outlined five reasons
1. Already know - no need to measure it. Often when business owners don’t have KPI’s it because they believe they know what is going on This might be the case when the business is very small however it definitely not the case when the business expands. It is the little things that the KPI’s will reveal. Little things that added together will make a huge difference.
2. Got real work to do - There can be an attitude that having a few targeted metrics distracts people away from doing the real work. But, it is the business who is willing to spend the time to work out how to do things betters is the business who will succeed. Just because it seems like unproductive time it will lead to consistent improvements which will mean a better business, better profit and more enjoyable for all.
3 Bottom Line is good enough. There could actually be two reasons within this statement. Some business owners believe that it is possible to manage a business from the profit and loss statement. These statements are just history and by the time the information is in the P&L Statement it is too late. Also the other part of the statement is that if the profit of a business is growing it can make management complacent. This can then lead to the focus being put on the wrong things. Some key metrics will keep the focus of the business on what is important.
4. Don’t like or understand numbers. Unfortunately I have heard this one too often. But it is simply impossible to manage the business without knowing or understanding the numbers. But it does not need to be a list of complex numbers. Numbers can be graphically presented to make them easy to understand for everybody.
5. Don’t have the data. Whilst this may be the case it should not be used as an excuse not to redesign the systems so that data is available. Take the time and ensure the data can be collected so the metrics will be useful.
It is necessary to understand the key numbers of a business so correct management decisions can be made. 01
The problem with benchmarking.
Often I here businesses saying that they are better or worse (not often they admit to worse) than the industry. But there is a problem here.
If a business compares its data to even best practice within their industry I believe are missing the point.
The business that succeeds in an industry don’t just compare themselves to others but rather they change the game. They look for ideas from outside their industry and innovate. Innovation does not happen by just comparing to other like companies.
It is important to have the correct key performance indicators and to regularly monitor these but to get ahead of the curve it is necessary to have measures focused on what is important to customers.
KPI’s and the financial data used to compare to industry show only the result they do not necessarily show the systems operating in a business. This is where the innovation will come. By looking at what the customers really want and value and then working a way to deliver this effectively.
Three measures of profit a business needs to know.
Often we have a measure of overall gross profit and net profit of the business but there are three profit measures we need to pay more attention to.
These are :-
- Profit that each product or service contributes to the business
- Profit that each customer contributes
- Profit that each job,task or sale contributes
Overall profit of a business could hide a lot of things. There could be products / services, customers or jobs that are unprofitable. If we armed with the information then we can make decisions.
Some years ago I was involved in a project for a business where the profit per product was measured for the first time. There was 242 products and the project found that only 72 of these were actually profitable. There were another 45 that were marginal which meant that maybe with some improvements these may become profitable but the rest were unprofitable. This business had been providing a large number of products which were costing the business even though overall the business was profitable.
All customers are not good customers. A good customer is one who is profitable and a great customer is one who also refers people to our business. But the business needs to know the contribution of the customer to the revenue and profit. Businesses need to get rid of the unprofitable customers so that focus can be given to the great customers to build that relationship.
Lastly there may be jobs or tasks within a product line offering that are not profitable. With this information we can then determine how to make this more efficient or to make changes to the product / service offering.
All businesses need to know these three measures of profit.
What are your thoughts?
What we measure is what we get
Oftentimes in business, the owners or management have an expectation as to what the team should be delivering. Also, the owners and the managers usually believe that the team should be aware of issues that pertain directly to the customer. Finally the management then get frustrated when either the production is not met or the service quality standard is not achieved.
The question that has to be asked is this – what are the owners/managers measuring? Or, if they don’t have a specific scorecard to tell everybody how the business is going, what are they reacting to?
So, for instance, in their staff meetings or individual meetings with team members, what are they talking to their staff about? If they are concerned about the quality but then all they react to is whether there has been adequate production, the staff will soon become aware that “what matters around here” is production, not quality. Behind the scenes, the management might be getting frustrated with the quality, but all they are reacting to in their team meetings is another issue.
So whether it is by way of a relevant, accurate, timely scorecard, or whether it is just by way of management actions, what we measure is what we get.
This point has been illustrated to me recently in a company that I have been working with, where we are in the process of implementing production targets. There was an expectation that the team could only produce 1000 units per day, and there had been some days when production was as low as 800 and not many days when the production was in excess of 1000. So implementing a production target of 1000 per day to start with, with a goal that within 4 weeks we would be able to increase that to 1100 per day, had a remarkable impact. Within 1 week, the team was exceeding 1100 and nearing 1200. Five weeks later, they were at 1400 per day.
Nothing else has changed, other than there is a scorecard, and there are positive consequences happening through reward and recognition from management of achievement of the team. The team has beeen able to together, without input of management, learn how to improve processes that have enabled increased production. Prior to this scorecard, management thought they were doing well when 1000 units per day were produced.
Measures (KPI’s) drive behaviours. Now we can’t measure everything but we need to carefully measure what is important because they can influence the actions of the team.
What we measure is what we get. What are you measuring? Do you have a scorecard? If you don’t have a scorecard, what are you reacting to? There is no doubt that measures can change behaviours. It doesn’t mean that we should measure everything that moves in a business. We only must be measuring what matters, either to the end customer or to the efficiency within the business. There is not doubt that what management views as important by their actions is what they will get.
So again I ask – what are you measuring in your business?
Are you making enough from your business - a way to measure this
A ratio that can be used to determine whether you are getting an adequate return from your business is Return on Capital Employed (ROCE).
ROCE is calculated as follows :
Let me ezplain further. EBIT means the net profit of a business before interest and taxes. The capital employed can have a number of different meanings however it is the capital necessary to make the business perform. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.
Now before I go onto an example with every ratio it is not perfect. The assets figures in the financial statements are usually represented at cost or even depreicated. This means if the business is using assets purchased many years ago then the ROCE would be better than a business using assets purchased recently everything else being the same. Thus we need to be careful with this number but it is still very useful. We can make adjustments by valuing the assets at their current value to get a better idea of the true ROCE.
So lets look at an example:
|
|
ABC Pty Ltd |
XYZ Pty Ltd |
|
Operating Profit |
100,000 |
150,000 |
|
Total Assets |
500,000 |
1,200,000 |
|
Current Liabilities |
150,000 |
150,000 |
|
Capital Employed |
350,000 |
1,050,000 |
|
ROCE |
28.57% |
14.28 |
The return of both companies is above what could be obtained from investing the proceeds in shares etc but don’t get caught by a larger profit must be better. ABC has a small profit but is using the assets more effectively and thus is a better managed business.
What is the ROCE of your business? Is it sufficient? If not what are you going to do to look at ways to improve it?
Are you measuring what matters online?
Measurements matter, especially online, and the internet, through tools such as Google Analytics and a myriad of other devices and applications, we can measure all aspects of a business’s online performance. Through these tools, we can know how many people are looking at exactly what pages of the website, at where did they come from, how many pages of the website did they look at. We can measure what click-through rate there is from our campaigns. We can measure the traffic that was generated and the conversion of that traffic. We have the number of Twitter followers, the number of fans on Facebook, and all sorts of things, but what really matters? Once again, no matter whether we’re talking online numbers or the numbers offline in respect of our business, we need to be focusing on those numbers that really matter in our business. We need to know what is important and then, armed with that information, we can adjust our strategy accordingly.
Particularly, let’s focus on the number of Twitter followers and the number of fans on Facebook. There are many people out there who are unfortunately just trying to garner the largest Twitter follower base or Facebook base or LinkedIn connections, but really what matters is the connections we are having with those people - how engaged are we with those people? We could have 7000 followers, but are only communicating and engaging with a handful, so the number becomes somewhat meaningless. We could have a number of fans of our Facebook page, but they aren’t interacting with us and we aren’t interacting with them, so whilst the number is of some use, we need to be concerned with how many of these followers or friends or connections we are actually engaging with. We need to have loyal friends and fans who are willing to provide word-of-mouth recommendations and engage with others on our behalf - they are the followers we need, and we need to know how many of those we have in our various online communities.
It would be more appropriate to have 50 followers on Twitter who really are enthusiastic about our product or service, than 5000 people who we don’t engage with or are not interested in us. Seth Godin speaks of tribes, garnering people together who are willing to join a community and be actively involved. We need to remember that a person is only part of a tribe by choice and through active engagement. So accordingly, for our online activities, we need to be engaging with people.
I have seen people talk about the traffic they get to their website, but how much of that traffic is actually being converted into some engaging activity with the business? We need to always remember, whether it is in respect of our offline business or our online activities, to measure what matters, focus on engaging with our community, engaging with our customer base, garnering the connections with the people who are willing to promote and participate in our tribe.
Your thoughts on this would be appreciated.
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