Business measurement is not a tool to beat yourself over the head with, but should be seen as your business’ compass to ensure that you are on track to achieving your vision, mission and goals.
Measuring your progress is the quality control function for your execution process, and covers every aspect of the business.
Your “business plan” comprises a marketing plan, an operational plan and a financial plan. Each of these will have specific activities to measure.
MARKETING PLAN
In this plan, you described what your target client “looks like”. Now, check to see who your clients actually are. Do the plan and the reality match up? If not, assess why, and adjust your original plan if needed.
You have also described how you would reach your target market with specific actions. Measure whether you actually completed those actions, and what the outcomes were. This, together with the target client description, will guide your future efforts.
When do you measure and take action? It is recommended that you check progress and compliance at least monthly (in a start-up, you may want to set weekly targets and measure them accordingly), but act only after a pattern establishes itself.
Here are some of the actions to monitor:
· How many people did you contact, how many of those people became clients, how much did they spend and how often did they pay for your product or service?
· How many adverts did you place, where did you place them, and what was the response (including social media advertising)?
· How effective has your website been, and what has and has not worked?
OPERATING PLAN Measurement of this plan will differ depending on your type of business.
The key to deciding what to measure is to establish which factors (no more than five at a time) will most affect your progress, and set key points or milestones for each factor. These are factors you will measure at predetermined intervals.
You may want to consider the following:
In a manufacturing business - your capacity, the efficiency and quality of the process and product, the skills required for growth, the stock levels of raw materials at any time, the stock levels of finished goods.
In a retail business - your stock levels, the effectiveness of sales persons to close the deal. These may be closely related to your marketing activities and business performance measures.
In a service business - these measures will be directly related to the marketing goals and measures (and sometimes they will even be the same).
FINANCIAL PLAN The finances of the business always reflect the financial activities, but also the successes and future expectations.
To be able to measure your financial progress, it is important to have a reliable and accurate system to capture all your transactions. Alternatively, you can seek the expertise of a reliable accountant.
It is from the reports that this system produces that you will be able to measure your financial progress, and success.
These reports (income statement, balance sheet, cash-flow statement and budgets) will enable you to track whether your marketing and operating plans have converted into the desired and planned financial results. They will enable you to predict your capital and cash needs in the short term, and will show you where in the working capital management you need to focus some attention.
What are some of the indicators?
1. Compare actual results against budget.
Some would argue that it is only necessary to look at sales. However, The Springboard Academy’s Terence Knott-Craig recommends that you start with comparing the projected profits. To do this effectively, you would have to consider the projected expenses, GP% margins and sales. You would also need to assess why there is a deviation (there always will be but you should aim for this deviation to be negligible), and take corrective actions where necessary.
2. Compare the actual cash flow to the projected flow. Compare the cash inflows (if you sell on credit, are customers paying per their agreements). Is the outflow in line with the projection (are you paying early, on time or late, in comparison to your projection).
3. Compare and check the solvency of the business. This ensures that your assets are greater than your liabilities (i.e., if you sold everything now, and collected all your money together, would you be able to settle all of your debt).
4. Check your liquidity. This means ensuring that you always have enough liquid assets – those assets you can turn into cash quickly - to pay your short-term debts, and buy the necessary stock to continue to trade.
a) Current ratio = Current assets / current liabilities
b) Acid test ratio or quick ratio = (Current assets – stock)/ current liabilities
The process of managing the above liquidity components is usually referred to as working capital management.
Why working capital?
These are groups of things which generate the means for the business to continue trading. If you do not have enough cash to buy materials or stock, you will not be able to manufacture or sell the company’s products. If your clients don’t pay you on time, you may not have enough cash to pay your suppliers. They, in turn, will stop supplying your business which means no materials to produce products to sell.
Measure, measure, measure it all!
Some people might tell you to just keep an eye on your bank account to monitor how much cash you have. But Knott-Craig recommends that you manage all the items that affect that bank balance to avoid receiving an unpleasant surprise one day.
It is very important to not only measure activities in isolation, but rather cross-reference them on an ongoing basis to see how they affect one another.
Measurement is not only to keep you out of trouble, it is to assist you in making timeous decisions to steer the business in the right direction. In turn, it will help you, the entrepreneur, to realise the mission and vision goals of the business.
Mentorship
All start-ups and small businesses need to invest in effective mentorship to remind them of all the critical actions they need to take, what to measure and how to interpret the results. This person will not be making your decisions, but will help you consider all the options before making an informed decision.
The Springboard Academy is ready to assist you in making those informed decisions.
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