When I think about this time of the year, I think about cooler weather, harvesting, pumpkins and falling leaves. I also think about reflecting on the past year and planning for the next one. At this time, many organizations are conducting fall planning sessions and/or releasing new strategic plans for the future. Those plans often include key performance metrics that measure progress.
Are we measuring the right indicators? In other words, is what we are measuring able to help us determine if we are on track with our strategy? From my personal experience and through the work done with our diverse client base, here are my top 5 for consideration:
1. Employee Satisfaction Score. It is a well-known fact that attrition hurts financial performance. As a result, there has been an increased focus on developing happier workplaces and on improving organizational culture. With the pressure on margins and the constant competing demands on resources, the measurement of employee satisfaction rates will provide you with the guidance you need on how well your retention strategies are working. We have found that the best way to enhance performance is by focusing on the areas that matter the most to your people.
2. Customer Satisfaction Score. Apart from the primary objective of knowing how well an organization is meeting the needs of its customers, this score’s trending over time helps in identifying the critical areas that need the most attention. Many organizations don’t take the time or want to invest in resources to collect this data, but often times feedback provided by your customers through even the simplest customer engagement programs will enable you to zoom in on process gaps and lapses that are negatively impacting customer service.
3. Cash Flow. Cash is king and keeping your expenditures below your collections is business 101. However, cash flow management goes beyond keeping track of how much money goes into and out of the business. By taking a more strategic approach and monitoring your company’s distinctive cash flow metrics over time, you can free up excess cash flow so that your organization can invest in new products and markets, pay down debt and finance other strategic initiatives. Strong cash flow also puts businesses in a better position to negotiate more attractive financing terms with lenders and steeper discounts with suppliers.
There are a number of operational inefficiencies that can be identified based on your set metrics in this area. The most significant metrics companies need to monitor and include regularly in their strategic discussions are:
- Days sales outstanding (DSO), which is a measure of the average number of days that a company takes to collect revenue after a sale has been made. Obviously, businesses want to get paid as fast as possible once a sale has been finalized.
- Days payables outstanding (DPO), or how long a company takes to pay its creditors. If a business is paying creditors significantly faster than it is collecting receivables, it probably already has a cash flow problem.
Other key metrics include interest rate charged by suppliers, discounts offered for fast payment and tracking balances in company checking accounts. Ideally, a more advanced cash flow management process doesn’t just give companies the ability to take snapshots of these metrics, but also provides a way to project and implement cash flow scenarios for planning purposes.
4. Productivity. Productivity ratios can be applied to almost any aspect of your business. Is your goal the launch of a new product offering – measure Return On Investment (ROI). Do you want to determine which accounts to focus on – measure sales productivity across accounts. You may want to take your results one step further and compare your company’s productivity to industry norms by consulting industry metrics or standards. You can also check your organization’s for continuous improvement by accumulating statistics over time. Inspiration to change your strategic plan may come from what you discover by reviewing data compiled over a longer period of time.
5. Gross Margin. This is like the mother of all business metrics and the best indicator of a business’s health. In its simplest form, gross margin (GM) is the product of sales minus product costs and direct operating costs. Gross margin varies by industry and is impacted by numerous internal and external factors. Gross Margin trends for your business (especially in comparison to industry trends) will help you assess if the business is on the right track operationally in meeting your strategic goals. Managing and monitoring gross margin on a regular basis goes a long way in reducing unpleasant surprises in the long run and is helpful in determining critical strategic initiatives for pricing, investments and sales efforts.
The key performance metrics used in your business need to be reviewed periodically with your planning team. Business is dynamic, and your metrics should be dynamic as well. What makes sense to measure today may be irrelevant tomorrow. Also, it is not enough to measure, you also need to act. No metric is useful unless there is a clear action plan that is born from the effort of creating your metrics and is communicated and implemented with urgency. Don’t let your metrics and analyses become just another number on a report that nobody pays attention to until it is too late.
About: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.