When we were little kids, we played street hockey until our toes froze (or until mom called us in). The games were played to ten, and we always kept score.
The best businesses keep score, constantly, of their most important strategic metrics. Strategy is the outcome of what you do everyday!
The three most important metrics in any business are: production, sales, and cash flow. I’ve been writing about these for years and recommend that everyone include them in their daily and weekly flash reports.
As a leader or board member, it’s your role to ensure that management is measuring the right things.
Figure 133.1 Strategic Oversight Framework
The major challenge in business is to convert broad strategic objectives into daily results and metrics so people can track their progress and performance. The key steps to properly measuring results include: setting up the appropriate plans, measuring outputs (and not just inputs), and setting timelines or deadlines.
- Plans — If your goal is growth, then the result is new revenue or business in certain geographic areas or product lines and at appropriate margins. Just measuring top line growth without considering bottom line impact can lead to a serious degradation in profitability. The plan will guide the implementation of strategy and the measurement of the right results.
- Metrics — The metrics need to measure the results that are aligned with strategy. Too many businesses just measure expenses like the inputs of production, such as time and materials. The most important metrics are: how much we produced, how much we sold, and how much we got paid.
Production is how much you completed or generated that day. In a service business, you can measure production time worked against time billed to give you the revenue efficiency.
Your future sales orders, divided by production speed, gives you the backlog.
Your cash collection will help you to determine your velocity, or total days to cash. Watch your invoicing speed and receivables aging.
- Timelines — too many businesses measure their performance solely on their monthly financial statements, which are often a few weeks old. It’s much more important for management to measure results – production, sales, cash flow – on a daily and weekly basis. These results are tallied and reported to the board for their regular quarterly meetings. You want and need this information graphically.
As a board member, knowing that management is tracking the important results — production, sales, cash flow — on a daily and weekly basis, will increase your confidence in the quarterly reporting, because the basics are being dealt with every day.
- What are management’s strategic plans?
- How do you measure progress on strategic initiatives?
- What are the daily, weekly, and monthly results?
If you’d like help to measure — and improve — results in your business, give me a call.
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