Category Archives: Metrics

Are you making these same dangerous mistakes with your business metrics?

Metrics.

A single word, a simple concept.

Or is it…?

A metric is simply a measure of something.

Almost every business I know, big or small, has at least a few metrics that it uses to help it make decisions.

And one of these metrics is sales. How much in sales was achieved yesterday, or last week, last month, last quarter, or for the year to date. We’re talking money here.

Quite a few businesses will also track volume – how many objects, items, or instances of a service, were sold. Here, we’re talking about simple counts.

And quite a few businesses will also track the average sale price or ‘ASP’ – defined as the financial value of the sales achieved in a given period, divided by the volume for the same period.

And of course there is the sales forecast – an estimate, hopefully based on some intelligence, of the sales and associated volume anticipated in a given, future period.

And that is pretty much it – sure, there will be some metrics relating to a few key processes, such as on-time delivery, waste, and so on.

But these aren’t enough – not from a sales perspective. Not from a business acumen perspective. And some are frankly, dangerously misleading.

I’ll explain why, with examples, and then show you what you can do to avoid the same traps, and so have a more useful and robust set of metrics for your business.

Let me start with a couple of basic principles. You probably know a couple of these, but perhaps not all.

  1. Metrics fall in to one of two types – leading indicators, and lagging indicators. Sales figures for example, are lagging indicators. They tell you about what has happened in the past. Now, this does not mean that sales forecasts are leading indicators because they tell you about the future – more on that in a moment.
  2. Only leading indicators are useful for helping you directly run your business. To be a leading indicator, a metric must meet the following criteria:
    1. It must refer to something that you can change – you can’t change last week’s sales figures;
    2. It must measure a quantity that exists today, and this quantity, what ever it is, correlates strongly with a future situation – e.g. for every 25 visitors who download a free tool or informational paper from your website today, 5 of them will spend at least $30 with you in the next 3 months.
    3. It must be unequivocal, clear – averages tend to hide extremes and concentrations that indicate something deeper at work;
  3. A key metric or indicator relates to things at the business level. You shouldn’t have too many. Any other metric will relate to a specific part of the business. Between them, your key metrics will also reflect the core values of your business.
  4. Have a balanced set of metrics – financial, customer, process and growth/learning/people – with clear definitions and target values.
  5. Regularly review your key metrics and the data that feeds in to them to make sure that
    1. The metric is still useful – you’re not simply measuring it because it’s easy to measure and measuring something is better than measuring nothing – so the myth goes..!
    2. The metric is (still) accurate – it actually does measure what you want & need it to measure.
    3. The people impacted by it (the metric) or whose activities affect it understand its existence and relevance to the business and to individuals.
    4. The metrics together tell the essential story of your business – nothing important at the business level, be it process, results, or values, is left untouched by any of the key metrics.

About my earlier warning that some metrics can be dangerous…

This almost always involves averages – for example, the average sale price. Add up all the prices you get for each individual sale, and divide by the number of sales. You can use this to forecast future income or sales revenue for a given value of volume. But how accurately?

If you have 10 sales people, you may have 2 or 3 who contribute say, 50% of the sales. You wouldn’t know this because averages tend to smooth these features out… so you couldn’t identify which individual sales people would benefit from extra support, or which sales people could help with that. You wouldn’t know who to go to out of these 10 to take their practice & methods and spread this through the others – sharing best practice…

Averages are useful, but not in isolation. If possible, also look at how the data points that go together to make up the average value, are distributed – look at their associated ‘standard deviation’ which is a measure of spread, and use metrics like this to help you target your continuous improvement efforts.

In earlier posts, I listed the core elements of business acumen – your set of key metrics should cover all of these – at the very least, the following:

  • Cash – grouped by the main sources of cash, including sales
  • Margin or profit – before & after taxes etc, with a track on costs, discounts, etc.
  • Return on assets – so you know fundamentally how efficient your business is at turning investments (usually your own money) in to cash
  • Growth – is your business fundamentally able to grow and is it – is enough of your sales coming from new customers and/or new products?
  • Customers – do they pay on time and in full? Do they come back for more? Are they recommending you to others?

So my call to action is a simple one: review your metrics, starting with a blank sheet of paper… and identify, using the pointers above, those few metrics that really tell the story of your business. Identify the data that goes in to forming each one. Make sure people who need to know about these, well, need to know about them – in full.

Then put a note in your diary to review them again in 3 months time – and change them as appropriate.