How to use metrics to stay focused within a vision.
The secret to stay focused within a vision is to find metrics that make your achievements seem small.
This may seem a little crazy. Often we want to celebrate our and our teams achievements. We don’t want people to lose heart in the goal. So there is a balance to be achieved here.
We can have the various goals that reward and motivate performance along the path but also never lose sight of the vision.
To this end I heard a senior executive of Pandora Radio www.pandora.com stating that despite their magnificent growth figures they still only had about 2% of the total radio hours in the USA. So the metrics of growth, number of new subscribers were motivating metrics along the path but the overall metric of share of radio hours keeps them focused on their long term vision. If there was not the metric of radio hour share then they could be distracted by their achievements. It could lead to complacency.
It is still necessary to celebrate the progress but also staying focused on the vision is important.
What metric do you have to make your achievements seem small and keeps you focused within a vision?
Photo by:- Krisph
Australian Wellbeing Index – A good measure of performance
French President Nicolas Sarkozy is reported to have said at the Group 20 Summit in Pittsburgh in late 2009 that the world could have predicted the economic crisis had it looked at happiness, wellbeing and sustainability.
Governments and intergovernmental organisations have been looking for additional measures to the traditional quantitative measures like GDP (gross domestic product) and GNP (gross national product).
Well here in Australia there is the answer. The Australia Unity Welling Index is a simple but effective index of wellbeing. This index is compiled scientifically and is meaningful. There is the Personal Wellbeing Index and the National Wellbeing Index.
Presently the index has risen to 76.3 on a 100 point scale which show Australians are more satisfied with their future security and standard of living.
There are many interesting stats within the data from the index however the point is that qualitative data collected in a correct manner can add more value to the quantitative data. It completes the picture of the nation or the business.
You can access the index measurement tool on australianunity.com.au/wellbeingindex/
Photo :- Richard
Cash Flow Management – A Useful Metric
There are many financial metrics that can be utilised to look at the working capital and cash flow issues of a business. For the purposes of this post I want to focus on one number that can be a useful tool for a business.
This is a financial metric called days of working capital. To calculate this metric it is:
Working Capital ÷ Sales By Day
Working capital is defined as Accounts Receivable + Inventory – Accounts Payable.
This metric shows how much working capital we have on hand, and we need to cover sales. If the answer comes up as 22, then we have 22 days of working capital on hand to cover sales generation. Whilst this is a historical indicator, it is still a useful number to know to consider sustainable growth ie growth that we can fund from existing working capital.
Too many businesses fall into the trap of growing quickly and not being able to keep up with cash. This number shows a business how many days of working capital they have on hand and thus shows what sales growth is sustainable.
To be able to grow faster it will be necessary to add to working capital. This could be added by taking out a long-term liability, which will add to the current cash position of a business, to ensure that the sustainable sales targets are able to be met. This metric gives an insight into managing the sales and working capital needs of a business.
Photo: Alan Cleaver
Quantitative and Qualitative Measures
Quantitative data never tells the whole story. Quantitative data is easier to collect and analyse and thus we tend to give it a far greater importance in our business. The accounting industry makes it easy for us to get a raft of quantitative data on the performance of the business.
Qualitative data though completes the story. But collecting and analysing qualitative data is a much harder process, and thus often is neglected in the management of the business.
For example to make a good product decision we need to know what is being sold, to whom, at what margin, this is the quantitative data. But we also need to know why some products are selling more than others. This question of answering the why takes a qualitative analysis of our customer’s decision, and often this involves judgment calls. But it is this qualitative data that will complete the story about the reason why a product or service is selling more than another.
The quantitative information may imply, a pricing or a market need, but the qualitative data, ie. actually asking the customer, may indicate that there’s something altogether different that is going on.
We need to have both qualitative and quantitative measures in a business. We need to have the judgment calls as much as we need to have the cold hard factual financial analysis. The blend of qualitative and quantitative data will give us the tools to lead and manage a business.
Photo:- by digitalART2
Look Ahead Rather than Behind – What data are you using.
A lot of the data that is collected in companies tells the owners and managers how they have performed in the past; whether it’s the past month, 6 months, or 12 months. The financial statement that we prepare are only a record of the past. The profit that is revealed in these financial statements is only revealing customers decisions made in the past.
This is not to say that financial statements don’t have a place, and I’ll do a blog post in the next few days on what we do need to use them for. We cannot lead a business or even effectively manage a business when we’re only looking behind us rather than ahead.
We need to therefore ask what data is necessary that will help us get ahead of the curve, instead of just reacting. This is where we focus on non-financial metrics to give us an insight into customer’s decisions right now, or potential future customer decisions. It is these insights that then can lead us to better decision making.
Does your data help you look ahead rather than behind?
Photo: – By John Poplett
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 Evidence & Intuition.
In a recent blog post I outlined the 5 aspects that make our intuition unreliable and inconsistent. We need to consider the alternative to purely relying on human intuition in business. There are numerous factors in play in business from the various market forces to the various customer, direct customer base to internal team issues, government issues, economical issues etc. Even the simplest business has a number of factors at play and relying only on human intuition means that some flawed decisions are being made.
I must reiterate that I’m not saying that we must never use human intuition. My point is that leading & managing only by intuition is a problem.
As I have asked in recent days “how do you know”. We must look at data and understand what pattern is in the data. But it is not just any old data. Just because it is easy to get it does not necessarily mean that it is important.
The first step is to understand what is driving the business and then determine what we need to measure.
There are a raft of statistical techniques designed to find patterns and I don’t wish to complicate the management of small business in referring to statistically techniques however a number of these are very simple to utilise in a small business but can be extremely useful.
The use of statistically techniques can be applied to any setting including wine evaluation. Princeton economist Orley Ashenfleter predicts Bordeaux wine quality and hence eventual price using a model he developed that takes into account winter and harvest rainfall and growing season temperature. Massively influential wine critic Robert Parker has called Ashenfleter an absolute total sham and his approach is so absurd as to be laughable. But Ashenfleter was correct and Parker wrong about the 86 vintage. Also his way out on a limb predictions about the sublime quality of the 89 & 90 wines turned out to be spot on.
It’s not just wine that we can analyse the data to determine a more accurate prediction or to make a more informed decision.
But we need to measure what is important to the success of the business. This success factor will be found in the operations of the business not the financials.
To illustrate the power of looking at the evidence a paper in 2000 surveyed 136 studies in which human judgement was compared to algorithmic predictions. 65 of the studies found no real difference between the two and 63 found the equation performed significantly better than the person. Only 8 of the studies found that the people were significantly better predictors of the task at hand. If you are keeping score that’s just under 6% win rate for the people and their intuition and a 46% rate of clear losses.
So why is it that we continue to place so much stock in intuition and expert judgement. Overall it is clear we get inferior decisions and outcomes in critical situations when we rely on human judgement and intuition instead of hard cold boring data and measurement. This may be an uncomfortable conclusion but it’s the fact. We need to make better judgements thus we need to have those boring data and numbers.
Again I’m not proposing that we remove or dispense with the human expert or the human business owner but rather we couple the humans in the middle of an evidence based process. This has been the situation with medicine where the evidence conducted from numerous studies of techniques and processes and drugs pave the way for doctors to provide the correct diagnosis but it hasn’t removed the need for intuition of the expert specialist to make a judgement call. They are just being able to make it with the cold hard facts and the knowledge of the studies undertaken previously.
In a business if we have the information if we have the right numbers, if we have the right measurement then the management will be able to have this as their starting point for making decisions and determining the future of the business. Surely these decisions will be better informed as a result.
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.
How do you know?
Recently Joseph Michelli gave an excellent podcast and also the transcription was up on his blog, asking the question “How do you know?”
In his podcast Joseph talked about in his experience of dealing with some business clients, that they’ll state a particular situation is the case and Joseph will then ask the question “How do you know?” What data is being collected to verify this stated fact?
I would like to also endorse the comments of Joseph Michelli. It is critically important in business to have the facts at hand to make informed and correct decisions.
Too often assumptions are made about how the customer is behaving, how the staff are behaving, that are not actually based on fact. They may be generally held belief within the business or organisation, but nobody has undertaken the task to collect some data to verify the reality. Yet it is only with this data that you have a starting point to determine how to improve the business, or a part of the business.
Data does not to be collected using the most complex IT system, collecting everything. There are many simple tracking and analyst tools for collecting useful data of a business. The key thing is actually to determine what area is important that we need to focus on.
What is the engine of the business? What has the potential to drive future value in the business. Often there is one key area that the whole business needs to focus on for a period of time, or it may be one area per division of the business. But it is important to have the data as the starting point.
Don’t make assumptions. Don’t accept generally held beliefs without some verification. The data allows informed decisions, and the application of intuition to the development of the business. Constantly ask yourself an your team “How do you know?”
Photo :- LauraKGibbs
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