Key Metrics Usage

Continuing our probing of the focus points of driving business results, we will explore “Key Metrics Usage” in this issue. There is an old business adage that still rings true today: “Things that get measured generally get better.” This is particularly true in organizations that have reasonably talented people who have reasonably “bought in” to the objectives of the organization.The key question, of course, is “What do we measure?” The answer is, measure things that are important to your desired financial results— ongoing profitability and cash flow. You want to measure things that, by doing more of them or less of them, will make you more money. In theory, if you are measuring the right things, you should be able to predict what your financial statements are going to say. Depending on what business you are in, some or all of the following items may be “Key Metrics candidates”:

Key Metrics Candidates::

• Cash Flow:: This applies to all businesses. You want to stay on top of your cash position and understand upcoming inflows and outflows.• Sales Revenue:: In total, by product, by store, etc. Second only to cash flow.• Sales Returns, E xchanges, Refunds:: These can vary sharply by store.• Gross Margin %:: Same as sales revenue. What you make on what you sell.• Orders:: If your business takes orders that eventually become sales. • Potential Projects:: For an engineering or construction firm, the number, dollar value, timing and probability of the projects you are chasing.• Past Due Orders or Milestones:: A key customer-service point. Those instances where you have “in effect” broken a promise to a customer.• Rework Orders:: Again, customer service. Those instances where you have to do something a second time for a customer because the first time was not correct.• Inventory Turnover:: In total, by product, by supplier, by store, etc. Keep the fast turners in stock and keep liquidating the slow turners.• Receivables:: Aging by customer, with current status noted.• Payables:: Aging by supplier, with payment plan noted.• Factory Cycle Time:: If you manufacture a product for sale.• Labor Productivity:: If you either manufacture a product or perform a service. Hours per unit of output, direct hours versus payroll hours, overtime hours.Another key question is “How often do I measure?” Looking at the above list, I suggest daily for sales revenue, monthly for inventory turnover and factory cycle time and weekly for everything else. ÎOne last question:: “How to measure?” We suggest the following:1) For items which have a target, such as sales revenue, measure versus the target and against the actual for the same period in the prior year, summed weekly.2) Inventory turnover, receivables and payables agings and factory cycle time are best reported in trend format, looking backward for 13 months.3) Cash flow should utilize a looking forward, rolling 13-week forecast.4) Everything else can utilize a trend format looking backward for 13 weeks.5) Always keep track of the “best ever” and the “worst ever” and note whenever a “new record” is established.www.thebizmd.com808.672.0220

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