As we continuing exploring business growth together we come to one of the most essential points that successful companies understand – critical numbers. So what exactly are your critical numbers? They are the metrics that determine your company’s success or failure, and by making sure they move in the right direction you can achieve your objectives and attain greater profitability.
You can’t move your company forward if you don’t know what criteria really matter. It’s crucial that you figure out what activities and metrics drive your business and track them with a vengeance. For some it might be weekly client meetings, for others it might be unit sales… it might even be inventory turn… whatever matters, pay attention to that. Sounds simple, but it’s not. So let’s walk through the process of discovering and using your unique critical numbers.
First, there are different perspectives that help you find your key metrics:
• Basic critical numbers. These are the numbers that you must hit day in and day out to stay in business. For airlines it’s a percentage of seats filled. For a factory it might be units per hour. For a service firm revenue per labor hour drives the bottom line. What is your most basic measure of productivity?
• Weakness critical numbers. These numbers help you turnaround a weakness when they move in the right direction. Think about where you run into trouble and attach a value to it. Is your inventory accuracy lousy? Is your backlog too low? Do you need to diversify your revenue stream away from a single anchor product by a certain percentage?
• Opportunity critical numbers. Opportunity numbers are fun because they let you measure a great leap in your performance. Maybe it’s releasing a new product by a specific date, reducing defects, or finding a new supplier who will allow you to undercut a competitor’s price. Whatever the external opportunity – what critical number will ensure that you grab it?
• Crisis critical numbers. These numbers aren’t as fun – but they’re really important! When your business is in trouble, what will ensure your survival? Cash balance in the bank, a certain debt ratio, or minimum revenue per employee? What will really matter in an emergency?
Now that you know the angles you might take as you think about critical numbers, let’s discuss the actual process. If you don’t already know what your financial drivers are (because they keep you up at night!) here’s how to find them:
1. Ask questions, gather data and analyze. Compare your performance to industry standards and see where you are off base. Talk to customers, employees and investors about what’s important to them. Conduct market research and scout out what competitors are doing. Once you have a lot of information, sit down and analyze it to see where you can have the greatest impact.
2. Define objectives. Strategic planning may have already given you clear objectives, but if you aren’t sure what you need to do first you need to get clear fast. Sit down with managers, staff and even outside contractors to figure out which objectives will be your focus areas for the next few quarters.
3. Prioritize. You can’t do everything at once, so look at the list of objectives that you’ve defined and decide what is most important. Your team can’t achieve anything if you give them too much to track, so focus on 1-3 key numbers for each person, group or department that they have a lot of personal control over. Make sure they have access to the information and resources they need, and that you share progress regularly.
An honest analysis of your current situation and desired situation should yield a plethora of objectives to choose from. Once that list has been condensed, one simple company-wide objective for each quarter will give you a cascade of critical numbers that apply to various people and departments.
I can’t tell you what your critical numbers will be because they vary so much from company to company, but I can tell you this… what the specific metric is that drives your business doesn’t matter. What really matters is that everyone in the company is contributing to the same set of objectives in a tangible, measurable way.
Sunday, March 29, 2009
Friday, March 20, 2009
Cash Flow Management 101
Most small businesses don’t rise and fall on their profits – what affects them the most is CASH FLOW. Cash is your business's lifeblood. Managed well, cash keeps your company strong. Managed poorly, your company tanks.
Knowing what affects your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay. Not true.
The accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss at the end of the period - not cash flow.
The "bottom line" of your P&L is net income. And net income does not tell you what happened to your cash balance during the period. Meaning you can show a profit at the end of the month, but have had difficulty meeting payroll on the 15th and paid some bills late along the way. Your statements may show profit but your cash flow stinks!
Cash flow is made up of more than just profit and loss. It also is affected by: Accounts receivable, inventory, accounts payable, capital expenditures, borrowing and changing debt service, the timing of all these activities.
That's why you can't look at your income statement and see what happened to your cash during the month.
Luckily, the first step to improved cash management isn't exactly brain surgery: just start maximizing cash flow. There are many ways for companies to improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. Try to bring cash into the company as quickly as possible: bill promptly, aggressively follow up on overdue invoices, and, if possible, require up-front deposits when making sales. Then hold onto your cash as long as possible by managing your payables. That means, quite simply, take as long as you're allowed (without incurring late fees or interest charges) to pay your bills.
For more elaborate cash flow management, you must accurately assess your current cash position and make fairly reliable projections at key intervals about how much you'll need to meet expenses in the future.
If you're interested in delving deeper into cash management - shoot me an email at trish@akamai-consulting.com and I'll send you an Excel spreadsheet that will help you make easy cash flow projections for a full 12 months!
Knowing what affects your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay. Not true.
The accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss at the end of the period - not cash flow.
The "bottom line" of your P&L is net income. And net income does not tell you what happened to your cash balance during the period. Meaning you can show a profit at the end of the month, but have had difficulty meeting payroll on the 15th and paid some bills late along the way. Your statements may show profit but your cash flow stinks!
Cash flow is made up of more than just profit and loss. It also is affected by: Accounts receivable, inventory, accounts payable, capital expenditures, borrowing and changing debt service, the timing of all these activities.
That's why you can't look at your income statement and see what happened to your cash during the month.
Luckily, the first step to improved cash management isn't exactly brain surgery: just start maximizing cash flow. There are many ways for companies to improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. Try to bring cash into the company as quickly as possible: bill promptly, aggressively follow up on overdue invoices, and, if possible, require up-front deposits when making sales. Then hold onto your cash as long as possible by managing your payables. That means, quite simply, take as long as you're allowed (without incurring late fees or interest charges) to pay your bills.
For more elaborate cash flow management, you must accurately assess your current cash position and make fairly reliable projections at key intervals about how much you'll need to meet expenses in the future.
If you're interested in delving deeper into cash management - shoot me an email at trish@akamai-consulting.com and I'll send you an Excel spreadsheet that will help you make easy cash flow projections for a full 12 months!
Friday, March 6, 2009
Developing Action Plans
So, what are action plans really?
Action planning typically includes deciding who is going to do what and by when and in what order for a whole company to reach its strategic goals. Now, if you're a sole proprietor you might be saying, “I AM THE WHOLE COMPANY!” And that’s OK. The design and implementation of your action plan will depend on the nature and needs of your unique business.
Actions plans specify the smaller tasks needed to achieve each of the core strategic planning issues your business faces. They become a bridge across the chasm between where you are and where you want to be. They outline measures of success so that you know when you reach each of the associated goals. They create accountability for follow through by spelling out who will tackle each action, what they need to complete the job, and what time line is acceptable.
"We think in generalities, but we live in detail." Very true.
Here is a quick guide to help you understand how to create an action plan and what elements should be included.
You need someone to take responsibility for each bold step within the action plan. Remember, if you don't reduce the steps to work assignments, they won't happen. And you've got to put someone's name on each one!
I’m working with a client right now who is extremely capable in his field of specialization, but has one huge managerial flaw. He fails to assign specific responsibilities to individuals. Instead, he constantly brainstorms ideas or suggests "we really ought to...,"you should think about..." And that's as close to organizing work as he'll get. Does he have problems? Oh, you bet! His staff comes out of meetings not knowing what to actually implement. They don’t know who is supposed to do what. No wonder the firm suffers from gridlock and chaos.
Let’s look at the elements of a good action plan one at a time:
Strategy: State exactly what strategy you are relying upon to guide the action plan.
Desired Results: Why bother at all? State upfront what will define success (your DESIRED STATE!)
Bold Action Steps: The real action plan should start as a list of the required action steps (or tactics) listed in chronological order so that they flow into each other and nothing crucial is skipped. These steps, taken together, will accomplish the intended strategy. Think about all the activities that must take place and in what order they make sense. What should be done first? What tasks will take a long time? How will the project logically unfold? List the steps in chronological order and by priority.
Assign Accountability: Write someone’s name down as responsible for each step on the list.
What is required?: Without creating a complete project plan for the responsible person, give them the framework to succeed by laying out your expectations of how the action step will unfold and your requirements of their work product. (This gives them the start of their own action plan with more detail!)
Resources and Investments: Naturally, you're going to employ resources to accomplish each action step. These resources may include money, space, equipment, people and information. List the specific resources required to complete each task. Go ahead and plan for allocating the resources to the responsible person as soon as they are needed. And while money is important, don’t discount the need for extra hands or knowledge you don’t currently possess. The resource which turns up scarce more often than any other is the human resource. Time and talent are priceless!
Measure of Success: What will be the key indicators that the action step is complete and has been a success? Lay out several critical factors that you will use to evaluate performance. These could be numbers, ratios, ratings, system changes, a new manual, etc…
Deadline: Things don’t tend to get done without a pressing date on the horizon. Even though you have to be flexible as a manager and allow the strategic plan to unfold in the best way, accountability is necessary to see results. Put down clear dates and set expectations for when each action step will be completed.
Action planning typically includes deciding who is going to do what and by when and in what order for a whole company to reach its strategic goals. Now, if you're a sole proprietor you might be saying, “I AM THE WHOLE COMPANY!” And that’s OK. The design and implementation of your action plan will depend on the nature and needs of your unique business.
Actions plans specify the smaller tasks needed to achieve each of the core strategic planning issues your business faces. They become a bridge across the chasm between where you are and where you want to be. They outline measures of success so that you know when you reach each of the associated goals. They create accountability for follow through by spelling out who will tackle each action, what they need to complete the job, and what time line is acceptable.
"We think in generalities, but we live in detail." Very true.
Here is a quick guide to help you understand how to create an action plan and what elements should be included.
You need someone to take responsibility for each bold step within the action plan. Remember, if you don't reduce the steps to work assignments, they won't happen. And you've got to put someone's name on each one!
I’m working with a client right now who is extremely capable in his field of specialization, but has one huge managerial flaw. He fails to assign specific responsibilities to individuals. Instead, he constantly brainstorms ideas or suggests "we really ought to...,"you should think about..." And that's as close to organizing work as he'll get. Does he have problems? Oh, you bet! His staff comes out of meetings not knowing what to actually implement. They don’t know who is supposed to do what. No wonder the firm suffers from gridlock and chaos.
Let’s look at the elements of a good action plan one at a time:
Strategy: State exactly what strategy you are relying upon to guide the action plan.
Desired Results: Why bother at all? State upfront what will define success (your DESIRED STATE!)
Bold Action Steps: The real action plan should start as a list of the required action steps (or tactics) listed in chronological order so that they flow into each other and nothing crucial is skipped. These steps, taken together, will accomplish the intended strategy. Think about all the activities that must take place and in what order they make sense. What should be done first? What tasks will take a long time? How will the project logically unfold? List the steps in chronological order and by priority.
Assign Accountability: Write someone’s name down as responsible for each step on the list.
What is required?: Without creating a complete project plan for the responsible person, give them the framework to succeed by laying out your expectations of how the action step will unfold and your requirements of their work product. (This gives them the start of their own action plan with more detail!)
Resources and Investments: Naturally, you're going to employ resources to accomplish each action step. These resources may include money, space, equipment, people and information. List the specific resources required to complete each task. Go ahead and plan for allocating the resources to the responsible person as soon as they are needed. And while money is important, don’t discount the need for extra hands or knowledge you don’t currently possess. The resource which turns up scarce more often than any other is the human resource. Time and talent are priceless!
Measure of Success: What will be the key indicators that the action step is complete and has been a success? Lay out several critical factors that you will use to evaluate performance. These could be numbers, ratios, ratings, system changes, a new manual, etc…
Deadline: Things don’t tend to get done without a pressing date on the horizon. Even though you have to be flexible as a manager and allow the strategic plan to unfold in the best way, accountability is necessary to see results. Put down clear dates and set expectations for when each action step will be completed.
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