07/ 25/ 2005
by Michael Alter
They say what you don’t know can’t hurt you, but nothing could be further from the truth when you run a small business. If you operate based on gut instinct or make assumptions about how your business is performing without knowing the facts, you can run into problems quickly.
Fortunately, a simple solution exists. Monitoring a few key business metrics will allow you to quickly get a handle on your business and start on the path to improving your profitability.
Business metrics, or measurements of business activity, have long been considered the exclusive tool of the number cruncher, the bookkeeper or the statistician. That's no longer true.
In today's increasingly flooded marketplace, the mantra should be: "You can’t manage it if you can't measure it." By defining the metrics important to your business and monitoring them closely, you gain three benefits:
- Focus. Defining the metrics most important to your business allows you to tune out everything that isn’t related to those key measurements. As a result, you’ll find that you and your business are much more efficient.
- Better vision. Companies that monitor metrics can spot threats and opportunities faster than companies that don’t. Your metrics will give you keen insights into what’s happening within the four walls of your business, as well as overall trends in your industry.
- Better decisionmaking. Metrics provide a framework for making business decisions. With the numbers in black and white, you can make well-reasoned decisions on how to proceed. If a decision improves your key metrics, consider it. If not, move on.
Implementing Metrics
Getting started with metrics is easier than you might think. Many small-business owners don’t understand how simple it is to collect and analyze these numbers. A simple, seven-step process will get you started.
1. Define your goals. Make a list of your business goals, which might include sales objectives, target profit margins or success at signing up new customers.
2. Define the metrics. For each business goal on your list, write down a metric that will help you track your progress to success. For example, if your goal is signing up new customers, your metric might involve stating the number of meetings you will have per week with prospective customers.
3. Benchmark current status. Now that you’ve established your metrics, you need to measure them. You must determine exactly how your business is doing, even if the truth hurts. By establishing the current value of each metric, you’ll be able to track your improvements in the future.
4. Put in place a system to monitor and report metrics. You may need to add new business processes that will help you calculate and report your metrics. For example, if your metric is the number of your customers who view your customer service as being excellent, then you may want to survey your customers every month and ask them how you’re doing.
5. Communicate metrics with employees. Once you’ve defined the key metrics that are important to your business, be sure to let your staff know. Then, everyone can make decisions that help improve the metrics.
6. Review the metrics and make decisions. With your metrics in place, you have greater insight into which strategies work and which don’t. Review the metrics and take steps to improve your results.
7. Promote successes. When your metrics improve, let your staff know and reward everybody who helped to make things better.
Best Metric Practices
As you move towards using business metrics to manage and improve your business, follow these suggestions:
- It’s important not to have too many metrics. Concentrate on only a handful of necessary ones.
- Choose the right frequency of measurement. If you only measure a metric once a year, you may not get the information in time to take the necessary corrective actions.
- Periodically reevaluate your metrics. Your business priorities change over time and your metrics will need to be modified accordingly.
Reaping the Rewards of Business Metrics
Effective use of business metrics can have a profound impact on your business. As you gain a better understanding of your business and move closer to achieving important goals, your day-to-day work will become easier and your staff will be more accountable to the metrics that matter. You’ll make decisions based on data, without the confusion of emotional input or information overload.
What Next?
Set aside a couple of hours to get started with your business metrics initiative. Decide what metrics you need, do some initial benchmarking and get started. Remember, what you don’t know can hurt you.
