2008 Summer Volume 8 No. 1

The Road Ahead: Performance Metrics

How do you Measure Success?

How am I doing? When you ask yourself that question, do you have a good answer? Can you say how effectively you are selling your product and finding new customers? Do you have a clear picture of how well your operating systems are working? Does your financial reporting provide full scrutiny of all aspects of your business, leading to constructive mid-course corrections? Successful businesses are constantly assessing themselves and making the adjustments indicated by their findings. Today, performance metrics are the cornerstone of improving your business model over time.

The Purring Engine: Your Selling System

Start where the heart of a company really resides—in business, nothing happens until somebody sells something!

According to Michael Gerber in "The E-Myth Revisited," selling is a soft system. He submits that every successful business must have a system of selling, evoking the old 80/20 rule to say that only 20 percent of businesses actually do have one, and the other 80 percent need one, declaring that he has seen the establishment of a selling system in businesses increase sales by 100 percent to 500 percent in almost no time. That statement certainly makes it worth your while to look at his premise, doesn't it?

Gerber sets out six primary steps to establishing a selling system for the sales staff in your business.

  1. Identify specific benchmarks for your selling process.
  2. Create a selling script for each benchmark.
  3. Create materials to use with each script.
  4. Memorize the scripts; don't read them.
  5. Deliver the scripts identically.
  6. Communicate more effectively by articulating, watching, listening, hearing, acknowledging, understanding, and engaging each prospect fully.

He recommends using a separate script (and benchmarks) for each phase of your selling system: The Appointment Presentation; the Needs Analysis Presentation; and the Solutions Presentation. Here are the benchmarks he recommends you use to measure the results and set future sales goals.

  1. How many calls were made?
  2. How many prospects were reached?
  3. How many appointments were made?
  4. How many appointments were confirmed?
  5. How many appointments were held?
  6. How many Needs Analysis Presentations were scheduled?
  7. How many Needs Analyses were confirmed?
  8. How many Needs Analyses were completed?
  9. How many Solutions Presentations were scheduled?
  10. How many Solutions Presentations were confirmed?
  11. How many Solutions Presentations were completed?
  12. How many solutions were sold?
  13. What was the average dollar value?

We would add one more benchmark: How many customer referrals were received?

The use of an effective selling system with sales benchmarks to measure results puts you in the driver's seat. It helps you consciously take your company from where it is to where you want it to be.

Take the Lead: Roadmapping your Operations

Historically, companies have relied on financial metrics to guide their strategies. But, those factors measure what has happened in the past. "Leading" metrics look at customer satisfaction, internal work processes, supplier efficiency, employee satisfaction, market share and profitability: factors that can help you improve your bottom line.

There are two ways to measure performance in your business. A performance metrics system gives you a high-level measurement of what you're doing—overall performance, an external view. A diagnostic metrics system helps you discover why a process is not working up to expectations—an internal measurement.

Generally, to ensure that you are achieving your best results and serving your markets at an optimum level, beginning with the external view (performance) gives you better insights into what improvements need to be made in your internal processes. Start by identifying and measuring the right aspects of your performance. Keep it simple; don't create red tape and slow down your operation. Use the SMART method—create objectives that are Specific, Measurable, Actionable, Relevant, and Timely. Here's how:

  • Specific: When measuring customer satisfaction, elicit direct feedback from customers about how they feel about your product or service.
  • Measurable: Ensure that your data is accurate and complete.
  • Actionable: Make your metrics easy to understand. State clearly what direction is good and what is bad, so that feedback triggers action.
  • Relevant: Measuring everything is meaningless; measure only what is important to your customers.
  • Timely: Build in immediate feedback. Take quick action on negative feedback.

Keep it simple. Easy-to-understand metrics are easier to sell and have a stronger impact on the process and the people who use them. You can track these data manually, or employ one of the many software systems available on the market today that help you track performance in measurable ways.

Fueling the Engine: Good Financial Measurements

Finally, and particularly in a small business, tracking your true costs can be the difference between success and failure. Once you've measured service satisfaction, optimized your sales efforts, and improved your product based on customer feedback, it's all about the financials. Your financial statement is the pulsing engine of your business.

Start with your cash flow statement. This is the fuel on which your business engine runs. Your cash flow tells you if you're on course, even more than your Profit and Loss Statement (P&L), which includes collections that you haven't made yet. Your P&L tracking systems should give you the total picture, including an accurate depiction of your cash situation.

Once you have a handle on your cash flow, here are the ten financials you should be tracking.

  1. Assets
    In order to have a true picture of the value of your business at all times, you should always know the depreciated value of your furniture, fixtures, and equipment (FF&E), as well as the value of any land or buildings your business owns.
  2. Liabilities
    In addition to knowing what you owe, keep track of regular costs like payroll taxes and loans, including how much is applied against principal and interest.
  3. Production Costs
    For an accurate picture of what your product costs to fabricate, include all costs, such as equipment, materials, and labor.
  4. Cost of Sales
    Always know what it's costing you to sell your product—things like advertising, marketing, labor, storage, and overhead.
  5. Gross Profit Margin
    If your gross profit margin (gross profit ÷ total sales) stays consistent or trends upward, your product is probably priced properly. When you see it going the other way, you can adjust your prices to keep pace with rising costs.
  6. Debt-to-Asset Ratio
    This is an important measurement because it tells you how much of your stuff you own and how much is owned by your lender. If this ratio is climbing, you may need to make a mid-course correction.
  7. Accounts Receivable Value
    If your accounts receivable, as a percentage of total sales, is rising, it's an indicator that your clients may be starting to falter. Pay attention; catch things before they go too far down the road.
  8. Average Collection Time on Accounts Receivable
    Calculate this number by dividing your average daily sales by your accounts receivable total. Are you acting as a banker for your customers?
  9. Accounts Payable
    View this as an early warning system. Is it happening because your customer is taking longer to pay his bills, or because he is making larger purchases overall? Monitor this to ensure your company's financial strength is intact.
  10. Inventory Levels
    Sometimes building your inventory is a good thing—when prices are relatively low, for instance. But, when your money is tied up in inventory, you can't be paying down your debt or improving your marketing.

An accurate and timely picture of your company's financial viability puts you in the driver's seat.

Stay ahead of the field

Constant and timely mid-course corrections will put you in the lead position in your industry. Installing performance metrics in every phase of your business will keep you there.

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