Key performance indicators are a great way to focus in on important areas of your business to gauge results, set goals and target improvement areas.
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Owners of growing businesses are so crazy busy that they rely on their gut too much and struggle with where to focus their valuable time. Determining where the business is doing well or doing poorly takes more focus and less gut. Entrepreneurs need a way to get information on business performance and get it quickly. One way to get that information is using Key Performance Indicators or KPI’s. In today’s show we are going to focus on what KPI’s are and how you should use them in your business to help you set and measure performance goals as well as manage your business.
*Key Performance Indicators or KPI’s can help you get a snapshot of how your business is performing in particular areas whether financially or operationally.
*KPI’s can help not only manage your business but also target areas of improvements you want to make in your business and gauge their success.
*It’s important to use KPI’s to understand your business against your industry peers and to pick the right metrics that, for your industry, defines success.
*Measures that may be important for one industry may not be as important or even irrelevant for another indusrty.
*Key factors to consider when choosing KPI’s for your business should be that they are relevant, meaningful and be able to lead to decisions and ultimately action.
*A good set of KPI’s can be used to set goals and objectives for your business to drive improvements both at the overall company level as well as the management team’s department level.
*Goals and strategies related to improvement initiatives can trickle down and create engagement for your staff.
*We discuss how the entrepreneur begins the process of identifying her own Key Performance Indicators and if she needs help doing it, the type of people and skills that can help her.
Resources and Links
Note: Links in this post may be affiliate links. Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.
The True Measures of Success by Michael J. Mauboussin in the Harvard Business Review. Find that here
To contact Lisa Roberts to set up a Quick Care session to review your business and get started with your own KPI’s follow this link
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Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track. You can find out more about her here
As an entrepreneur, focusing on your sales numbers is a good thing. However, focusing only on sales and not paying attention to the other key numbers in your business can hurt you in the long run.
You can listen to this episode by hitting the play button above.
To download the episode, right click on this link and choose Save Target As. Go to the folder where you want to save the recording and click Save or Enter.
You can make it easier to get the episodes, by subscribing to the show on iTunes here. Subscribing to the show gives you all the episodes and downloads them automatically to your preferred device so that you can listen to them when and where you want. And hey, if you like what you hear, please leave a great rating and review while you are there.
Business owners like to focus on sales and revenue growth as a measure of how good their business is doing. It feels good to tell someone that you reached X dollars of sales or that your sales are up 25% over last year. However, too much focus on sales can hurt you if you are not paying attention to other numbers in your business. Focusing only on sales and revenue growth can lead to problems for your business in the long-run.
*It’s important to grow sales but it is also to pay attention to things like sales mix and cost structure.
*Pay attention to sales mix so that your sales are not overly concentrated in one particular area or segment.
*Sales quality is explored and we define the types of things that help make a quality sale
*Unprofitable sales can hurt your business.
*Entrepreneurs need to understand their cost structure and define pricing and discount policies to avoid unprofitable sales
*A business’ cost structure includes both direct and indirect costs and each need to be considered when pricing products and services in order to achieve the profit margins that you are driving toward.
*We look at how to measure yourself against your own performance and your industry segment and benchmark things like margins and profitability.
Terms Used in The Episode
Sign up to my email list and receive a bonus gift. You’ll get a tip sheet that I put together summarizing what we talked about in this episode. Sign Up here to get You’re bringing in more sales, so why isn’t there enough money?
Lisa Roberts is a business operations specialist who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track. You can find out more about her here .
I got a call from a business owner who was at his wits end about some employee problems. The more I listened, the more I could see that his biggest problem was that there were no clear roles and responsibilities and no job descriptions.
Most growing businesses go through a period where they move from very entrepreneurial to a more structured organization. In the beginning, roles and responsibilities are loose and everyone chips in to get the work done. After a while, as you add new people to handle increased workloads, it will be difficult, if not impossible, to effectively manage everyone without some structure.
For my owner friend, it started with questions from an employee about fair pay.
What are some other signs that indicate you may need to get formal descriptions in place?
Five Signs that You Need Job Descriptions
Wage and Salary Questions – Anyone can go online, look at Monster or Salary.com for a certain title and view the compensation range for that title. A job description does not define title as much as it defines the specific job roles, responsibilities, skill set and the value of them.
Titles – Owners need to plan their growth structure as well the titles they use. As I mentioned, salaries may differ greatly by the title you place on a specific job. For example, if you call an employee a manager and they are really performing basic supervisory work, they may be confused about not only salary, but also responsibility and authority.
Lack of Clear Roles and Responsibilities – As your organization grows, not clearly defining roles and responsibilities will most likely allow things to fall through the cracks and leave tasks undone. Recurring incidents of important tasks left undone can also cause disorder, which can lead to frustration and ultimately apathy in the staff.
Employee Frustration – Confusion about employees’ job responsibilities will also lead to frustration and conflict. Employees like to know what’s expected of them so they can understand how performance is measured in order to be successful and satisfied in their job.
Boss / Authority Questions – Job descriptions also help clarify the “reports to “aspect of an employee’s job. Years ago, I personally dealt with this. It was both frustrating and stressful for me, as an employee, to answer to effectively two bosses.
Establishing job descriptions helps clear up confusion about who does what, what a position’s pay is worth in the market and help ease some of the chaos, frustration and dissatisfaction that your employees are feeling. There are other benefits to having good job descriptions at your company.
Four Benefits of Job Descriptions
Employee Performance – Part of measuring employee performance for both the employee and the employer is having a measuring stick. The job description is part of that measuring stick; how the employee performs against the required roles and responsibilities of his or her job.
Growth Path For Employees – Having an understanding of the responsibilities, duties and skills needed for an employee to move up to the next role will help him see a path for career progression. Not understanding what the next level is and how to get there can be frustrating for an employee who wants to develop and grow at your company.
Legal – Many legal issues surround this area and are too detailed to get into here. However, having a clear job description will help you define better, the pay scale, employee classification and may help if there is ever an employee dispute.
Recruiting – A job description will make it easier for you to recruit for that position the next time you have to fill that role or add more positions like it in your company. It will serve as the basis for the job listing so that you can easily advertise and recruit for that position.
Who Has Time?
As a business owner, you’re probably sitting there thinking I don’t have time to write job descriptions for all my employees!
Ask yourself these questions:
Are you spending time trying to find someone to do something in your business because it’s nobody’s job?
What’s the cost to your business when certain tasks fall through the cracks?
Do you have to stop what you’re doing and take time out because an employee is expressing frustration and dissatisfaction about their role in your company?
How much time are you losing from that employee who may not be as productive due to that dissatisfaction?
Are employees leaving because they feel underpaid because you gave them a big title without the pay – what’s turnover costing you?
Have you ever had a dispute with an employee about performance that resulted in large legal fees because of a claim of wrongful termination or violation of wage laws?
A little time now, can save time later
The truth is investing some time in writing job descriptions will create benefits in the long run. As you grow and add more positions, the need to have them will be more and more apparent. They will help you develop clear responsibility and clarity for the jobs in your company. Your employees will be happier knowing what their role is and what is required to achieve good performance. They may also help save you time and money in the long run.
Generating Cash Flow
As the economy continues to struggle and credit remains somewhat tight, managing your cash flows is taking on greater, if not, critical importance in survival of your business. Managing cash flow is an important activity to ensure that you are generating more cash than you are paying out and thus avoiding taking on too much debt to finance your operations. In a moment, I’ll share a key performance indicator that you can use to monitor one aspect of cash flow, but first a little background.
One of the first steps to maximizing your cash flow is to clearly understand how cash is generated in your business. Then you can identify areas where you may be able to improve your cash conversion cycle. The main sources of cash inflows in a business are the sale of goods and services, investment and lenders. Your business may acquire cash through investment in the business or from loans and lines of credit. However, the largest source will be from sales. To be successful in your business, you must ensure that those sales are converted to cash as quickly as possible to accelerate cash flow into your company.
The ways in which sales are converted to cash may depend, in part, on the type of business that your company is engaged. A business to business (B2B) relationship will have to make some different decisions when compared to a business to consumer (B2C) relationship. The main difference is that a B2B will almost always be forced to extend credit on account, where the B2C will not unless it chooses. The B2C company also has the luxury of relying on credit card companies to absorb some of their credit risk.
A business can never completely eliminate credit risk, but building a good credit and collection policy will help to minimize this risk. Once you establish a good credit and collection policy it is important that you adhere to it and monitor it. There are some very good articles written to assist you in setting up a good credit and collection policy so we will not go into that here. Once you have policies in place you must monitor your results closely.
Key Performance Indicator for Cash
One key performance indicator that will help you to monitor your cash inflows from credit sales is called Days Sales Outstanding or DSO. The DSO key performance indicator or KPI will indicate the average number of days it takes the business to convert credit sales to cash. The formula to calculate your DSO is as follows:
Total Outstanding Account Receivable divided by Total Credit Sales for the period being analyzed. Next, multiply that by the number of days in the period being analyzed to arrive at your DSO.
A higher DSO will indicate that you have a potential problem in collections and a lower number will indicate that you are converting sales into cash effectively. Here is an example for illustration: Assume total receivables of $1,100,000 and sales of $5,365,000 and a period analyzed of one year. Your DSO would be 75 days which says that it is taking 75 days, on average, to turn your credit sales into cash.
Monitor Your DSOs
Over time, businesses monitor their DSO to detect changes that may be adversely affecting their cash flow. As you review your own DSO’s, you should look for trends either up or down. A good trend is a declining DSO while an increasing trend is troubling for your business. For example, if your business sells on account at net 30 days and your DSO’s are at 75 days, this suggests there is a problem in your credit and collection activities and action should be taken. Furthermore, if you are required to pay your own bills within 30 days, it will become a much larger problem for your business as this gap widens.
If your DSO’s are trending up, there are a few areas to investigate and questions to ask.
Is the credit and collection policy being implemented and adhered to consistently?
Are you ensuring that customers establish their creditworthiness? Do you perform credit checks or keep limits lower until they prove they are creditworthy?
Do you bill customers in a timely manner?
Are you using an aging schedule and tracking past due accounts closely?
Do you have certain slow paying customers that are contributing to the trend and are you sending dunning letters or contacting them to follow up on past due invoices?
Are you following up with past due accounts to ensure that the shipment was received and correct?
Is the economy changing and having an adverse effect on customers’ ability to pay?
By answering these questions, you will be able to assess the reason for adverse trends in your DSO’s and formulate actions to improve the situation and ultimately improve your cash inflows. Take steps to improve your cash inflows, it could be the difference being in business or being out of business.
Generating Cash Flow As the economy continues to struggle and credit remains somewhat tight, managing your cash flows is taking on greater, if not, critical importance in survival of your business. Managing cash