Most small business owners have goals. They are usually vague, like to make a good profit, or grow sales. They are rarely:
put down on paper and are in the owners head
objective and quantifiable
effectively shared with employees
established for each key employee
utilized in employees performance appraisals
utilized to hold employees accountable for results
A measurement is operational in nature. It quantifies and outcome or a result. Your balance sheet in of itself is not a measurement. Your percent return on investment (ROI) is a measurement. The specific percent return on investment you want to achieve is a goal.
The vast majority of small businesses do not effectively manage their business with operational measurements or goals. One of my retail clients kept track of the number of sales they made each day (a good operational measurement). When I asked how many sales a day they wanted to achieve (their goal), they had no idea.
To be effective, a business must identify the key result areas they need to measure. For example, a retail store, among other things, needs to track its daily sales. A manufacturing company needs to track, among other things, its daily production.
This data needs to be graphed and trended in order to determine the direction in which it is moving. A measurement, without a goal, is not very useful. If for example, a retail shop sold $2 thousand in a day. The owner would know whether that was more of less than what they have been selling. Without a goal, however, the owner would not know whether that is what they need to sell.
First of all, it is critical to be measuring the right stuff. More importantly, they didn’t have effective action plans to improve the results of the things they weren’t measuring. The moral of the story here is that you don’t know what you don’t know! If you’re not measuring the right stuff, you can bet that it isn’t improving!
Spend time figuring out what needs to be measured. Some of the common measurements that need to be measured and are not necessarily always focused on are:
manufacturing cost per unit of output
waste (per job for custom businesses, per SKU for standard products)
sales dollars versus budget
margin percents by business segment or customer or product line or SKU
% R.O.S. or R.O.I. by business segment, product line or SKU
Some of the more subtle, but significant measurements that need to be focused on are:
On time deliveries
- I took over a custom products business doing quite well, or so they thought. They never measured on time deliveries. They were shocked to find out that 1/3 of their shipments were habitually late.
new business development
- Even though most failing business need more sales, not one I took over formally tracked new business or had targets for number of new customers, dollar amount targets for new business, number of appointments per week, etc.
- how customers rate our service, things like flexibility, responsiveness, and reliability versus competitors
- how professional and helpful our sales reps are versus competition
The key here is to step back and ask yourself what things we have to do really well in order to be successful. Some are not obvious. This is where a brainstorming session with your leadership team can really help. Once you decide what they are, measure the heck out of them!
So many small business owners tell their employees to do a “good job”. What normally happens is that the employee’s perception of what constitutes a good job and the owner’s expectations are not on the same page. In short, the employee must know in detail what a good job looks like.
The only effective way to accomplish this is by giving the employee objective, quantifiable, measurable goals to achieve. If the employee knows they need to sell X
amount of dollars or produce X amount of production, then they have a very good idea of what a “good job” looks like. Note that not all goals should be weighted the same. Some goals are more important than others. By differentiating the weighting of goals, the owner is telling his employee what goals are the most important to achieve. Make sure you differentiate the weighting of your employee’s goals. This is the foundation of achieving accountability.
You need measurements of your key operating processes
You need to know what a measurement is
You must have quantitative goals for your key measurements
Without measurements and goals, you cannot effectively hold people accountable for results
Most small business owners/managers are normally overwhelmed and have too much to do. This is because they spend virtually all their time doing work type work. While it is necessary to do a lot of work type work in a start-up to reduce overhead costs and lower the breakeven point, not spending a good deal of time managing the work effectively prevents most businesses from optimizing their results.
Most owners and managers have so much coming at them that they spend little time planning their own time. They react to the “crisis” in front of them or end up doing “busy” work like gift wrapping, mailings, operating the cash register, etc.
Research indicates that most owners and managers spend most of their time on urgent, but not critically important issues and opportunities. Most owners/managers are normally overwhelmed and have too much to do.
Most owners/manages spend most of their time fighting fires and dealing with what they perceive are urgent issues like making a sale, handling a customer complaint or deciding which bills to pay from their limited cash supply. This is called fire fighting. Unfortunately, most of the same type of fires is fought over and over again. Why? The immediate problem is resolved, but the root cause of the problem is not identified and fixed. Having to cope with the same problems over and over is taxing and exhausting. Furthermore, they prevent the owner from effectively managing the business. This phenomenon is usually caused by a lack of good practices, processes and procedures. Not only does this result in exhaustion and stress, but sub-optimal profit results as well. Owners end up working harder and getting less than desired results.
As strange as it seems, fire fighting usually appears highly time sensitive to the owner, but in the scheme of things, is usually relatively low in importance. Solving a customer problem, for example, is something that appears to be very timely to most owners. Since, however, they owner fixes the “immediate problem” and not the “root cause”, the same problem happens again, again and again. Fixing the “root cause” takes time as the process has to analyzed and new procedures developed. Fixing root causes in infinitely more important than having a quick fix for a problem that is going to keep recurring.
So how does an owner make time to solve “root causes” and find time to “manage” the business? This is a process I have utilized repeatedly, which has consistently produced great results:
• You gather the key players into working lunch meetings
• Brainstorm solutions to fix root causes
• Develop written practices and procedures
• Players have ownership for the “fix”
Eliminating needless fire fighting enables owners/managers to spend more time on the “less timely” but having a more significant impact on the bottom line of the business like managing.
What does the work that has a more significant impact on the bottom line look like? It is the key business practices we talked about in chapter three. It includes practices such as:
a) Goal Setting
c) Performance Appraisals
d) Cash Flow Forecasting
e) Flash Reports
f) New Business Development
g) Action Plans
h) Accurate costing (fully burdened labor & overhead)
i) P&Ls by business segment
Spending quality time working on the less timely, but the stuff that impacts your bottom line is how you make changes and improve results. Hard work is important, but working on the “right stuff” is critical. Now you know what the right stuff looks like.
Knowing what the “right stuff” looks like is only half the battle, how you do it is the other half. To accomplish this, owners must have written weekly “to do lists”. For some mysterious reason, most owners do not do this. The owners that do have written “to do lists” normally do not prioritize them properly. They tend to either address the “urgent” issues or they engage in the activities they enjoy doing. As a result, even with written “to do list”, the really important stuff never seems to get done.
The key is knowing how to prioritize your “to do list”. You must prioritize you “to do list” between “A” priorities and “B” & “C” priorities. “A” priorities are those that have the biggest potential impact on the bottom line. An example is do I man the cash register or do I develop an operating profit and loss budget for the business? Not having a profit and loss budget for the business has a tremendous potential impact on the bottom line of the business. Unfortunately, ninety-five percent of small business owners choose to man the cash register, even if they are not busy.
Thinking and more importantly, behaving in alignment with the important priorities is not something most small business owners do naturally. This has to be a learned behavior. Behavioral habits are hard to break. It takes conviction as well as commitment. It does not just happen. Once of my biggest challenges as a consultant is getting owners to change their behaviors and do their jobs differently. Some clients will say I do not want to be a CEO.
I tell them that they do not have to be a CEO, but as an owner, they have to manage. It comes with the territory. I tell them that if they do not want to manage, they either have to hire someone to do that for them or risk the much higher probability that they will not be successful. In many cases, the owner needs a consultant to give them the support to make the changes in the way they run their business. This is money well spent.
If you are not getting the “A” priorities done each week, you are getting sucked into fire fighting. At least if you have a written “to do list” with the proper “A” priorities identified, you will at least know if you are getting them done or not.
The most effective owners/managers and successful businesses are the ones that spend a good deal of time on “the right stuff” (“A” priorities). Do not just let the work come to you and deal with what shows up on your doorstep. Be selective on what you take on. If you get you’re “A” priorities done and nothing else, you will be successful. The unfortunate truth is that small business owners get so involved in fire fighting on “B” and “C” priorities, that the “A” priorities never get done. These are businesses that either sub-optimize their income results or go out of business.
Efficiency versus Effectiveness
Effectiveness is the degree to which the organization achieves their goals (assuming you have goals). Good job performance means your organization is achieving their goals. If your organization isn’t achieving its goals, all your people cannot have good performance appraisals. Performance must be tied to results. Results must be measured against established quantifiable, measurable goals.
Efficiency is the use of minimal resources to produce a desired volume of output. If you have a lot of output, put it is taking the Chinese army to do it, then you are really not being efficient. In order to determine if you are being efficient you need to have key measurements of efficiency. Some examples of efficiency measurements are:
• – labor productivity (e.g. cost per unit)
• – percent return on investment (ROI)
Efficiency results must be compared to standards (goals). Just knowing your actual result without comparing it to a standard does not do much good. For example, if I made a four on a golf hole, it that good or bad. Well, if par is three, not so good. If par is four, good and if par is five, terrific!
If your business is not obtaining a good level of profitability, your management team is not being effective. This is not the way most small business owners think about effectiveness. They tend to think about effectiveness with the level of activity.
If your management team is not effective, they can not be receiving good performance appraisals, and certainly large salary increases and bonuses. Again, most small business owners do not think about the performance of their managers in this way. While everyone got infuriated with the AIG bonuses, most small businesses basically do something similar.
1. Most small business owners do not properly plan and prioritize their work
2. Most small business owners work on the wrong stuff!
3. Not properly planning and prioritizing your work is a major contributor to business failures