It is unlikely that a sign and digital graphics business owner would ever hire an employee, pay her a fair wage and ignore checking her work, setting goals or measuring performance. No matter how large your business is, your company has a limited amount of money to spend on salary, and you probably use performance standards to gauge whether the investment in personnel is money well spent.

 

While most business owners, when it comes to employees, understand this concept, many don’t see that it applies to basic business functions, such as marketing, training and accounting, to name a few. In a very real sense, spending $2,000 on training or $10,000 on a direct mail campaign is like hiring another employee—it is an investment, which its return-on-investment (ROI) should be sought and calculated.

 

Paying attention to key metrics will help any business drive and/or realize corporate goals, assist in making better decisions, and help increase the market value of the entire enterprise. However, the trick is in selecting the right ones. Ideally, you should measure things that drive or reflect business results, can be influenced by easily-identified actions and can be measured accurately, consistently, quickly and cost effectively. Is your interest piqued? Let’s roll.

 

Bankrupt? Who, me?

A recent article on Yahoo! Finance cited 10 big, publicly-traded companies that were veering toward bankruptcy based one simple measure of perceived risk—Market Cap (MC) divided by Enterprise Value (EV). The MC of a company is simply its current share price times the total number of shares outstanding. However, it ignores the corporate debt, and for some companies, its debt is significant enough that it would change an investor’s view on the value of the company, if considered. The EV represents the minimum amount someone would have to pay to buy the business outright—therefore, the company’s debt is most definitely factored in. Thus, the lower MC/EV ratio, the less residual shareholders’ value (above what debt holders can claim) and the more the market thinks the company is likely to file bankruptcy.

 

Given that the article was written in September 2009, some of the companies that appeared on the list may surprise you—Hertz, Sprint Nextel, Goodyear and Advanced Micro Devices were conspicuously named. What were some of the contributing factors that led to their nominations, you ask? Falling demand, losing customers, union negotiations gone awry, and poor cash flow were most commonly cited. 

 

So, you may be asking yourself, “Since my company is not publicly-traded and we are not experiencing shrinking demand or lost clientele, what does all this mean for a little ol’ sign shop?” What it means is, if your business can be forewarned and sidestep replicating the set of circumstances that are leading big companies to be on the verge of bankruptcy, maybe your enterprise can avoid being blind-sided by the threat of going under without some notice. I’d say that’s worthy of establishing some key metrics that, at a glance, can illustrate to you and your partners/shareholders/investors/employees whether or not the company will remain a viable and growing concern.

 

What to measure

Without metrics, a business owner has weak options when it comes to making key business decisions. If, at this moment, you don’t have any metrics, you are probably making critical choices without any guidance other than a hunch, gut feeling or advice from someone who might run a business, but isn’t in the same situation as you are. I know this to be true because, in the first six to nine months of my company’s existence, that’s exactly how I tended to make decisions when it came to my business. And, I was in the business of offering advice to other companies. 

 

One common excuse for not establishing key metrics from day one is the lack of enough data to determine what should and shouldn’t be measured. In the absence of accurate data, most business owners resort to using a guess based on a benchmark standard, sound reasoning and assumptions, and good old-fashioned common sense. That has worked and will continue to work for many, but only for a short time.

 

Many small business owners don’t realize how simple it can be to collect and analyze relevant numbers and data. A simple seven-step process gets you started:

 

1) Define goals. Make a list of business goals—perhaps including revenue objectives and gross profit margin targets, or success at selling new accounts.

 

2) Define the metrics. For each business goal on the list, write down a metric that will help track progress along the way. For example, if the goal is to close two new accounts each month—worth at least $12,000 annually in invoice dollars—the metric might involve stating the number of sales calls or meetings with qualified perspective customers that should happen each week. Other commonly-chosen metrics include Days Sales Outstanding (DSO), dollar amount per job order, a sales rep’s close ratio, percent response on a direct marketing campaign, number of pieces finished per machine operator per day, ROI on a training program, percent uptime of production equipment, the number of excellent ratings obtained on customer-satisfaction surveys, and Days Inventory Outstanding (DIO), a.k.a. inventory turns. 

 

3) Benchmark current status but keep it simple. Once the metric has been established, devise a simple method of measuring it. Just documenting efforts toward achieving the goal will not ensure success. By measuring the current value of each metric, you will be able to track your improvements in the future.

 

4) Put in place a system to monitor and analyze key metrics. Not only does the reporting need to be brutally honest, but the data must be analyzed periodically—even if the truth is hard to accept. It may be necessary to implement new daily processes and procedures to ensure the data is kept current and reviewed on a regular basis.

 

5) Communicate metrics with key people. Once key metrics have been defined and data-collecting has begun, share the information with staff and advisors. 

 

6) Make adjustments based on metrics. With key metrics in place, you should have greater insight and keener focus into which strategies work and which are lagging. Review the metrics and take steps to tweak them to improve results.

 

7) Emphasize successes. When goals are attained and verified by the metrics, let employees know and reward key contributors to the company’s achievements.

 

Best practices

Once you buy in to the notion of measuring what you intend to manage, it may be beneficial to consider these suggestions:

 

Don’t have too many metrics. Trying to tackle everything at one time, which generates an overwhelming amount of work, is disheartening and may alienate support staff. They may even think that your “suddenly analytical” side is just a fad and that “this too shall pass.”

Choose the right frequency of measurement. For some factors—such as number of pieces finished per machine operator or percent uptime of production equipment—daily measurement is appropriate and will yield more data faster so adjustments can easily be made. Other metrics, such as DSO and a sales rep’s close ratio, don’t change but every month or quarter. For those slow-moving metrics, use a rolling frequency, say, over the last 12 months, rather than just for the month or quarter.

 

Periodically reevaluate established metrics. Business priorities change over time, and metrics need to be modified accordingly.

 

Effective use of business metrics can have a profound impact on your business, regardless of its size. As you gain a better appreciation for the value of measuring metrics, you will have a better understanding of the ebb and flow of your business, your day-to-day work will become easier with which to cope, and your staff will be more accountable to the metrics that matter most. Decisions will be made based on relevant data instead of on emotion or information overload. The next time an external threat arises—such as falling demand, unexpectedly losing customers, or inadequate cash flow—you’ll be warned ahead of your competitors and be better able to deal with the challenge. Remember, what you don’t know can hurt you. Good luck!