A business metric is defined as a quantifiable measure that is used to track and assess a business process/activity. They help give you better vision into your company and provide a better framework for making better decisions. While some owners and managers prefer the use of gut instinct or merely flying by the seat of their pants, business metrics are more grounded in reality. The metrics are used to assess what has happened and what is happening. They are also used to make better decisions about what will/could happen. Unfortunately, many business owners do not know where to start to take advantage of these metrics. Of note, business metrics are not to be confused with KPI’s.
If you are using any kind of software to track your business activities, you are already collecting data. This could include accounting software, spreadsheet software like Excel, POS software, time-tracking software, an inventory module add-in, or any other program. Many people, however, only look at quick/easily available/tertiary outputs from a program. It is an approach of seeing what you need to see in order to survive. As a CPA, some of the questions that I am asked are…Where is the information? What do I do with it? Can you help me make sense of this? Can you help me get the information that I want? Can you help me to define what information I need/want? The data is often there. You need to pull the data into a usable format, which is called information. You then analyze the data to produce your metrics.
For many, getting from Point A to Point B is where they get lost. There are a few things to consider, when thinking about your business metrics.
First, define your business goals. These could be something like annual sales of $5M, have a profit margin of 15%, increase new customers by 7%, and the like. If you do not know where you want to be, there really aren’t any metrics that can truly help.
Second, define and design the most important metrics for your business, but keep in mind that too many metrics will create more noise and less clarity.
Next, some metrics are comparisons so you will need to benchmark your business processes/activities. That way, you can see whether or not a specific activity is efficient, whether or not it profitable, whether or not other opportunities are available, etc.
You will also need to implement a process/system/control so that you may monitor and report your business metrics. Coupled with this, you need to review and evaluate/analyze the results. Are things better, worse, or no change? Do we need to change or tweak the process? What can we do to improve? Do we need to approach something differently? Are we operating at optimal performance? Engage in the next cycle.
Communication is the overarching theme in this whole process. Discuss the metrics with your employees and get them engaged. Tell them that the metrics are there and what they are intended to accomplish. Let them know that metrics are used to evaluate business activities and that includes the concept of individual and/or group accountability. Make sure that they fully understand and that you do not create undo anxiety. If the metrics show success, then promote that success. If rewarding individuals/groups/departments is order, then do so. If the results are negative, make sure that the metric was not poorly designed, then talk to the individuals that need improvements.
Getting started is always the most difficult step. You can look at or talk to other similar businesses. What do they measure and why? You can research the Internet. You can also talk to a CPA. They will have a breadth of knowledge to help you sort through all of this. Having the experience of working with a number of different clients in a number of industries provides the CPA with a wealth of opportunities to approach every situation from many angles. Metrics that work for a manufacturing company may not work for a services based company. However, there are some similarities around the costs of doing business and the CPA can often apply synergies between all clients.
-Michael Hermanson, CPA | CGMA