Envision this. The year is 2020 and you’re about to stand up and thank your team for a job well done. In the past 5 years your sales have increased an average of 10% per year, in spite of some difficult economic hurdles. Your business is financially efficient and extremely profitable. You have a happy team of employees that manage the business with little oversight. You have accumulated considerable business and personal cash reserves. As you reflect on the successes of your recent past, you marvel at how much your business has changed – all for the better.
Your business must continually change, adapt and improve its efficiencies to build value. A culture of continuous performance improvement creates more profit now and more wealth in the future. When building a better business and improving profit and wealth is your goal, measuring performance is your starting point.
Measure what’s important: the key benchmarks and drivers of success
Understand what your numbers say about your business and where you could improve
Get it done! Identify actions and create targets and accountabilities that lift business performance
Faced with so many possible metrics, it can be challenging to identify which are most important in your business. Start by monitoring metrics that help you focus on the activities that produce the results you’re after.
Our recipe for performance improvement begins with measuring the ingredients that add value to your business. That’s why you should select metrics that give objective feedback and help you answer these questions:
- How productive are you? Do you manage your resources – e.g. staff productivity, average cost per employee, equipment – as well as you should?
- How much profit are you earning? How do your profits compare to the profit leaders in your network or industry? To your best year?
- How well do you produce and manage cash? Consider ratios that measure how well you manage the lag between service and invoicing, how quickly you collect accounts receivable and metrics that indicate whether you have been paying lenders and suppliers on time.
- How financially strong are you? Consider ratios that measure your levels of debt, such as equity invested by owners compared with money borrowed from creditors. Asset efficiency (sales to assets) and return on investment are also indicators of the strength of your financial position.
Once you have calculated your metrics, the obvious question becomes “Is my number good, bad or terrible?” That’s where benchmarking comes in.
A benchmark is a point of reference from which measurements of any sort can be made. Benchmarking your business is the process of comparing your figures to the numbers you’d like to achieve. Here are some ways you can establish benchmarks for your business:
Your past performance: To get a sense for trend, look at a minimum of three years’ history – up to five years if it’s relevant. You can even use your “best” year as your past performance benchmark.
Actual results to budget, target or goals: When you compare actual to budgets or targets you’re benchmarking against where you want to be. You can then investigate the difference or variances from what you planned and refocus your actions as needed.
Industry averages: Industry benchmarks can be useful to assess how you stack up compared to your competition, or to other businesses that are similar to yours.
Benchmarking can have an impact far beyond the accounting department. With proper commitment, communication and leadership, it possesses the potential to reform all the levels of the company, modify processes, reveal flaws in what were previously considered inherent truths and confirm improvements achieved. Used strategically, benchmarking can transform not only the business, but the product or service itself, the corporate culture and the attitudes of employees.
Now back to your vision for 2020: You’re about to stand up and thank your team for a job well done. As you reflect on where you’ve been, you say to yourself, “everything changed when we really embraced managing by the numbers, setting stretch goals with rewards and accountability, and being clear with the entire team about our financial expectations.”