When a business is wholly reliant on determining it’s performance by whether it can pay its bills as it goes along, and the annual accounts prepared by their accountant which looks back over the year, then it is likely to struggle, as it is in reactionary mode.
To keep a business on track the business owner needs to be proactive. They should set up a forward-looking review process, which is suitably granular for the business. Reviews should be carried out at suitable intervals, weekly, monthly, quarterly and annually. The reviews will need to include the key business areas of; Marketing, Sales, Operations, People and Finance
Whilst it is tempting to believe that one metric leads all others and focus on that, in the belief that everything will take care of itself, this is not so. All the metrics are related, and a successful business will be looking at them holistically and working out the next best move.
By establishing a balanced hand full of key performance indicators, KPI’s, the reviews can be easily carried out and the appropriate action taken. The selection of the KPI’s and their calculation should be done with care to avoid unbalancing the business.
The McNamara fallacy, named after Robert McNamara, the USA Secretary of Defence 1961-68, sums up the risks of blindly setting and following arbitrary metrics.
- The first step is to measure whatever can be easily measured. This is OK as far as it goes.
- The second step is to disregard that which can’t be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading.
- The third step is to presume that what can’t be measured easily really isn’t important. This is blindness.
- The fourth step is to say that what can’t be easily measured really doesn’t exist. This is suicide.
In the next blog I will suggest some suitable frameworks for to use for setting KPI’s.
In the meanwhile, if you need to reset how you keep your business on track, get in touch with me, for a no obligation discussion on setting KPI’s. http://ow.ly/SyPn30j0MUY