Do you find it difficult to know what to focus on in your business?
Are you keeping an eye on the critical business indicators?
In my travels, I have had the pleasure of working with business owners whose businesses operate at varying levels of success. In my assessment, the following are 7 simple yet critical indicators of good business practice. By this I am not talking about optimum performance I am referring to the mandatory things that should be done by all businesses at a basic level.
- What the most profitable products are
In many cases, owners haven’t put in place a formal product or service strategy. They tend to have only a gut feeling as to where profits are coming from. The focus is too often on building sales revenue by attracting new business rather than building profitably, that is revenue rather than profit. Only after undertaking an in depth review can we identify what the most profitable lines are. And of course this can change over time as margins are squeezed, so regular analysis is critical.
- Who the most profitable customers are
I recently undertook a customer profitability review with one of my clients for their top 6 accounts. The results were actually staggering. It turns out that the client is actually losing money on 2 of those 6 accounts. In addition to this, it became apparent that the key customer was not as profitable as initially thought and one of the more margin accounts was contributing far more to the bottom than first thought. Just a collection of facinating information that has now enabled us to tweek our strategies moving forward to ensure maximum returns. This will include actually dropping some product lines amoung other measures.
- What the expense drivers are
Many businesses have never formally analysed their true cost drivers. What activities in the business are driving costs and what mechanisims can be put in place to control and manage thses costs? Quite often we appreciate the contribution of gross profit from incremental business but fall to recognise its effect on enterprise overhead in the longer term. The cost of waste in business can as much as 20% of overhead. A huge number!
- How to keep control over cashflow
It’s one that affects pretty much all of the businesses I see and I know that it can be a difficult one. But systems and procedures must be established and prompt action taken. Timely issuing of invoices, documented and enforced trading terms, rigorous follow up and customer selection are all ways to keep the cash coming in. Thought must also be given to funding growth, CAPEX and the like. A stong banking realationship and a budget cannot be underestimated.
- What the critical success factors
Understanding what the business absolutely has to get right is so important. These can be both financial and non financial. Typically I’m talking about sales $, conversion rates, sales enquiries, customer satifaction, employee satisfaction, inventory management, cashflow management, profitability, innovation, turnaround times, and the list goes on. You need to determine what these critical moments of truth are for your business.
- Key Performance Indicators
Knowing how to identify, measure and monitor the key performance indicators (KPI’s) that are directly related to your critical success factors is at the core of sound management. Once you have those factors identified, the business needs to build reporting mechanisims to ensure that you measure and monitor them. For one of my manufacturing clients we have a simple KPI Sheet which gives the management team a snapshot of financial data, production outputs, salesperson effeciency, errors & warranties and various other key items. It is simple, easily digestible and a very powerfiul focusing tool.
- Management Control Plan
Where no plan exists, decisions are often made reactively and are ad hoc, usually to deal with a pressing problem rather than the cause problem. Management by crisis is the order of the day. What is required is a board of management which meets at regular scheduled times with a set agenda and required outcomes. Such a structure would review such items as KPI’s, Financial Reports, Operational Reports, Marketing Reports and set and reset strategy in line with the business plan.
I hope that if you are not already doing all of these things in your business that you now sit down and get them done. Focusing on the important things will lead to immediate and amazing results.