When measuring success, it pays to keep your distance
Your business has stayed the course amidst untold degrees of uncertainty and persevered through the ups and downs. You have made significant sacrifices throughout this endeavour, bringing you to the very moment you are living today. But how well is your business really doing? Can you determine whether your business is successful or not?
For most business owners and managers, the answers to such questions are not obvious ones. A typical evaluation of the end result often ends up being based on biased personal perceptions, which stem from being directly involved in the operations. This presents the same difficulty as trying to appreciate a painting while standing too close to it. Proximity and familiarity prevent the owner-manager from gaining a sense of the big picture. Such a result is problematic because an accurate sense of the enterprise’s true performance is essential in benchmarking past efforts, clarifying present decision-making and understanding the definition of prosperity in the years to come.
Moreover, additional hurdles surface even when one’s personal bias is excluded from the equation. Real-world dynamics need to be captured by a model that separates the fluff from the good stuff, all within the strategic context executed and enacted by management and those charged with governance.
So the question then becomes: how does one measure success in a business? Through our experience, we have established what we call the Performance Assessment, a process designed to help categorize and streamline company performance evaluations. This is based on what we have defined as critical areas of business, helping companies identify opportunities for performance improvements and bring clarity to the picture of success in the business context. The critical areas listed below are universal throughout modern commercial activities and make a major contribution – both independently and in the aggregate – to a company’s longevity and prosperity.
Growth Generation: From sales to marketing to funding, are you attaining what is key to your business’ growth? Do you work to ensure your customers’ needs are surpassed?
Operating Efficiency: Including everything from Human Resources and processes to financial information, is your company operating at its fullest capacity? Do you have a clear understanding of the true cost associated with producing your product or providing your service?
Asset Efficiency: From inventory management to cash conversion cycles, are your assets achieving their greatest potential? Do you analyze and act upon underperforming assets?
Management & Governance Effectiveness: Are strategic plans, communications and corporate policies having the desired impact? Are inputs collected from the various departments in your organization?
While these critical areas have been identified as being fundamental to most businesses, their prioritization will be highly dependent on the stage reached in a business’ life cycle. A mature organization will often be interested in refining its financial reporting processes and equipping its personnel with high quality decision-making information (Operating Efficiency). On the other hand, a start-up will undoubtedly be more reliant on sales, marketing and cash flow preservation (Growth Generation) since these elements are crucial to the company’s short-term survival.
All enterprises, from small to large, have processes that need to be addressed and optimized. That said, there are many elements that directly influence the application of the Performance Assessment and its underlying critical areas. The challenge becomes identifying these elements and determining their impact on the process of selecting performance evaluation metrics. Ask yourself: What industry-specific measures are key to remaining competitive? Where do my company’s strengths fit in? How do selected measures align with my strategic plan? If the measures are unavailable, what underlying processes would provide me with an accurate evaluation?
Today’s off-the-shelf accounting software also provides a jump start: popular accounting software packages like Quickbooks and Sage can be equipped with customizable dashboard features, which are automatically driven by the very transactions entered into the system. Lastly, benchmarking can be facilitated by using resources such as Industry Canada’s Financial Performance Data, allowing you to compare one company’s statistics to those of similar entities, determining how well they stack up.
Coupled with such tools, a pre-established and versatile model goes a long way to ensure that key performance indicators are identified, tracked and regularly revised. By analyzing your business and categorizing applicable performance measures, as the owner-manager you’ll be able to effectively assess your entity’s performance by measuring the things that matter most. It pays to pause for an instant, and take a step back. Much like art, a business is often better appreciated from a distance.
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