Grow Your Business: Measure Company Performance
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“If you can’t measure it, you can’t improve it,” Peter Drucker is known to have said. The objective of measuring various performance metrics for your business is to help you determine what is working well and what needs to be improved.
The key point being made by Drucker relates to establishing key performance indicators (KPIs) for your business, then monitoring them on a routine basis. Most businesses have developed KPIs, but some businesses feel they don’t have the time or the need to review them. The latter mentality can be fatal to a business.
In his book Factfulness, Hans Rosling presented a compelling case for using and comparing numbers. He said, “The most important thing you can do to avoid misjudging something’s importance is to avoid lonely numbers. Never, ever leave a number all by itself. Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with.”
While there are many business textbooks and articles that stress specific indicators, there are several key measures for you to regularly review and use to adjust the direction and trajectory of your business. Here are some suggestions to help you measure your company performance:
Take a look at your monthly financial statements. First of all, be certain they are timely. Some businesses do not receive their statements until the end of the next month. You should be getting them by the fifteenth of the next month or sooner.
Your monthly Income Statement should be reviewed and compared to the previous month, the same month for last year, and year-to-date this year compared to year-to-date last year. Take a look at your Revenue line. See if it is increasing, decreasing, or staying the same. Compare it to previous points in time. Many companies have different areas or sources of revenue. Some have Product Sales, Services, Subscriptions, and other categories. Strive to get your sources of revenue defined and accounted for as accurately as possible.
If possible, allowing for seasonality, construct a reasonable monthly budget. If nothing else, it will provide you with a short term goal. It can be a huge undertaking to establish a budget for the first time, but subsequent preparation becomes less burdensome.
Review your Cost of Goods Sold (if you sell a product). Determine the Cost of Goods Sold (COGS) percent (COGS divided by product sales).
Analyze your Gross Margin with previous points in time. Determine if it is improving or declining.
Look at your overall expenses. You might have to dig a little more to find out what expenses are going up or down, in order to determine why they are changing.
Finally, review your Profit and compare it to other time frames in order to see whether your business profit is improving or not. The monthly income statement is but one of several key statements that necessitate your attention on a regular basis.
Other statements include the balance sheet, and the cash flow statement. Sales and Marketing KPIs should be developed, as well. These are but a few examples of what you should be reviewing regularly.
The power of a question is significant. Asking the question “Why?” can uncover many problems, as well as provide a path to solving difficulties. As you determine the appropriate KPIs for your business, be certain to frame the right question to the correct person when an issue arises.
Rosling also said, “When I see a lonely number in a news report, it always triggers an alarm: What should this lonely number be compared to? What was that number a year ago? Ten years ago……”
There are so many ways to measure success. Whether you perform month over month reviews, quarterly assessments, or annual summations on a regular basis, one of the keys for you as a business owner or manager is to develop a consistent means of measuring the performance of your company. Strive to be curious about new data as it becomes available. Think of ways to put new information to use. Rosling summarized things very well, when he said, “recognizing that a single perspective can limit your imagination, and remembering that it is better to look at problems from many angles to get a more accurate understanding and find practical solutions.” Developing and evolving key performance indicators will provide you with the timely information you need to grow your company.