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Benchmarking and performance measurement As your business has changed, have your ways of tracking its performance kept up? Most business owners have developed their short list of key criteria that they regularly monitor. “Ed” was no exception. He had over 20 years of experience in managing his wholesale distribution business and was comfortable with several regular monitoring factors. Ed kept a close eye on the cash, watching both the daily balance and the weekly deposit figures. He also reviewed the unfilled orders list, so that he knew how many days or weeks of business backlog existed. And when the monthly financial statement came from his business manager, Ed tended to look at just two numbers: The bottom line net income for the month, and the sales volume for the past month versus one year earlier. Ed’s business had always been profitable, he understood it, and keeping an eye on these three or four items had seemed to work well. But now, while owners of similar businesses were all talking about record growth and profitability, Ed’s business seemed flat. That information was troubling him, but he also had a more specific issue. With the sponsorship of one of his major suppliers, he had installed new inventory control software. The system was working, providing people in Ed’s operation with better information on inventory status, back-ordered items and unfilled commitments of the inventory. But the massive volume of new reports that the software generated frustrated Ed. His simple question to us: Which of these are important and which should I trash? Ed’s questions about monitoring and managing his business extended beyond just the inventory. His “watch list” of four or five items had not changed in 20 years, but the business had become much larger and far more diverse. Critical success factors. We talked through his business cycle from front to back – from the decision to procure inventory to collecting the check on the sale of that inventory. We helped Ed identify his “critical success factors” (CSFs) – those items that are essential to the business operating effectively, efficiently and profitably. Typical CSFs include:
With Ed and his team, we identified about ten CSFs, one of which seemed to be a factor in lack of growth. While his salespeople understood that new calls and creating new customers were to be part of their activity and they all said they pursued them, there was no measurement or incentive for this activity, and in fact little of it was actually occurring. By identifying “prospecting” as a CSF and then developing a target performance indicator, Ed established a benchmark for initiating and monitoring new sales calls. Key performance indicators. That second part of the process – monitoring – is every bit as important as the first. Once CSFs are identified, there needs to be an ongoing measurement, often called a “key performance indicator” (KPI). In Ed’s case, we came up with about a dozen KPIs that represent benchmarks for his business. Several of the financial KPIs are monitored by Ed alone, but most of the KPIs (many involving operational factors) are publicized to Ed’s team and represent goals they strive to meet. Conclusion. CSFs and KPIs represent far more than the latest alphabet soup of management tools. They are critical in helping you, first, zero in on what truly makes your company tick and, second, monitor its performance in those key areas. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
