Even the most profitable companies are always looking for ways to get better. When looking at a business, there are many ways to measure its success. A common mistake is to measure your business’ performance by focusing solely on the bottom line.
While your bottom line is an excellent measurement of financial success, it provides only historical information (a lagging indicator) and often masks other factors that contribute to your company’s profitability. By measuring and managing other key performance areas, you can transform a reactionary management approach into a proactive, real-time process that drives business success
Understanding the Profit Equation
Traditional thinking says that when it comes to measuring profit, you generally look at it this way: Revenue – Expenses = Profit. However, when it comes to improving profit, you need to look deeper into the activities that generate your revenue and drive your expenses. In general, People x Process = Profit.
Revenue and expenses are the end result of people’s behaviour as they operate within your company’s processes. The key to business success lies in consistently improving both your people and your processes to maximize the results you achieve.
There are really only four ways to grow your business: 1) increase the number of customers who deal with you; 2) increase the number of times they buy from you; 3) increase their average transaction value; and 4) make your business processes more efficient and effective. It’s easy to lose sight of these factors when you are consumed with managing daily activities, but these are the very things that will translate into a profitable bottom line.
Measurement drives performance
Within every business there is a string of activities that drive its success. Once identified, you can build measurements around those factors, and monitor how you are doing as you go. You create “leading indicators” that will keep your business on track to a profitable bottom line. The key is to measure, manage and improve these areas of performance on a real-time basis. Once you have all the information you need to make critical decisions about your business, you can effect small, incremental changes in key areas or activities that will have a profound impact on the bottom line. The idea is not to just make one thing 100% better, but to make 100 things just 1% better.
Mentor Plus Performance Measurement specialists advocate that a simple approach of measuring the following indicators is a first step in the right direction:
- Customer Attrition Rate
- Customer Acquisition Rate
- Average Sale
- Frequency of Contact
- Cost of Goods and Overhead
These indicators are a good starting point toward a balanced perspective of a company’s performance.
Much of the data you need to track these key indicators is likely already available to you. By simply setting up a “flash report” (a scoreboard of critical business measurements) you can provide yourself a guide for making day-to-day management decisions. Keep in mind that what you can measure, you can manage. By applying key measurements to your business, you will have the information you need to manage your company more effectively, empower your staff and grow your profits, and be well on your way to taking care of business.
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MNP is one of the largest chartered accountancy and business advisory firms in Canada, providing client-focused assurance, taxation and business advice. National in scope and local in focus, MNP has proudly served mid-market public and private companies for more than 65 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help clients succeed. For more information, visit http://www.mnp.ca/.