Keeping Score

by Bill Collier

“We monitor a set of key performance indicators and use them to make decisions.” – you

Do you avoid looking at your financial results until the end of the month? Or even worse, the end of the year?

The language of business is numbers. Business owners need a strong grasp of them and must be able to read and interpret financial statements.

Monitoring financial indicators like revenue, profit and cash flow is a good start. But each business has its own unique set of key performance indicators that should also be monitored. Some are financial and some are not.

Like keeping score in sports, you should monitor what’s going on while it’s happening.

What to monitor?

There’s no one-size-fits-all solution. You have to decide what indicators are critical to your success.

Don’t just measure something because you can. Ask yourself these questions:
• Can I describe what this indicator measures, why we need to know it and its impact on the business?
• If the indicator is off target, can we do anything specific to bring it back on track?

Carefully choose a few key performance indicators that paint a well-rounded picture of your performance.

Here are three approaches to identifying key metrics:
• benchmarking
• exception management
• trends

Benchmarking is a fancy word for “comparing.” It’s a good idea to benchmark your performance to see how you’re doing. For instance, you may think your 35% gross margin is pretty good. But if most of your industry is enjoying 40%-plus margins, suddenly your results don’t seem so hot. Industry trade associations are good sources for benchmarking information.

Exception management is the practice of setting up “red flags” – high and low marks for each important metric. Stay between them, and all is well. Stray on the wrong side, and corrective action is required. Exceed them on the good side, and it’s cause for celebration.

Exception management gives you freedom. It allows you to run your business without agonizing over every small change in your numbers. Instead of worrying about whether a 1% swing in gross margin is significant, just see whether 1% is within your “red flag” zone. If so, move on to other things. Benchmarking can play a role in setting your red flags.

Trends are noteworthy, regardless of whether a measure is within its red flag zone. Keep track of the trends of your key numbers so you can capitalize on positive changes in a timely manner and head off negative ones before they turn into trouble.

The whole idea behind the selection of key performance indicators is to shrink the myriad numbers, measures and ratios down to a manageable few that can be readily monitored by you and your team. Sometimes less is more.
“We monitor a set of key performance indicators and use them to help make decisions.”
Can you honestly make this statement? 

Bill Collier is the St. Louis-area coach for The Great Game of Business. He works with organizations that want to improve financial results, engage their employees and create a winning culture. Bill can be reached at 314-221-8558, GreatGame.com/stl, GGOBSTL.com or billcollier@greatgame.com.