Are You Measuring the Right Things?

In business there seems to be an unlimited number of things to measure. But the question is, are you measuring the right things?

Measuring the Unimportant

We know how important it is to measure things like sales growth or market share, etc. Those are good things to know, but by themselves are often insufficient. Another thing that is frequently tracked is employee headcount. Now, I certainly agree that knowing how many employees you have is important in a sense, but it is really just a raw number. What do you do with it and is it really that meaningful. Without some additional details, many business statistics like sales, market share, and employee headcount can easily become unimportant. The reason is they only scratch the surface. Let’s dig a little deeper

An Example in Sales

Assume you diligently track sales growth and you are showing a 15% increase over the same period last year. Sounds great, right? But here are some questions to answer before getting too excited:

  • Is the sales growth to customers who will pay on time or at all?
  • Are the products and services ones that provide adequate margins?
  • Is the sales increase due to one-time sales or ones that create repeat sales?
  • How much support is required to complete the sales and follow-up?

Well, you get the picture. For example, if new customers are likely to be difficult to collect from or even refuse to pay, you can quickly find your company needing additional financing to survive. It helps to think as if you are a cash business. That means that until you can collect a sale it should not be viewed as complete. In fact a sale you cannot collect can be even worse as you are now out the cost of products and/or services used to fulfill the sale.

If the margins are insufficient or too much sales and administrative support are required, it raises the question as to whether the additional sales are worth the effort. If increased sales are one-time events you really haven’t created long-term growth because you’re still going to be chasing customers to maintain the sales increase.

The point is that in addition to measuring sales growth or market share you should also measure other things such as product profit margin, cost of support to make sales, etc. That is what I mean by the question, are you measuring the right things?

Failure to measure the right things can easily become a ticking time bomb, waiting to create disaster in your company.

ticking -time -bomb

Consider some more examples where it is easy to not measure the right things.

Financial Reporting

It’s easy to get excited when profits are increasing. But, here again, profitability is just a starting point. If you have sales that create a sizable portion of your company’s profit but those same sales remain uncollected in accounts receivable, that nice profit increase may be blinding you to a coming financial storm in the form of cash shortages. One way to stay on top of collections is discussed in the posting 80/20 Rule for Receivables Management.

There are other areas where we get deceived. For example, we know that carrying excessive inventory is foolish and a drain on cash. But, consider this. Imagine your total inventory is well within the acceptable range. That’s good, but hidden within that total number can be numerous items where you are carrying a supply of 4, 5, 6 or more months. That is a danger area as overstocks, especially of slow moving items, can quickly become obsolete inventory for which you will never realize full value. For some more on that risk see Avoiding Obsolete Inventory.

Once again, the bottom line is are you measuring the right things?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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