Using key measures to make a profit

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We’re having trouble making a profit right now. Invoices are up this year, but so is payroll and just about every other expense. If we can’t make money, what’s the point?

Thoughts of the Day: Growth needs a plan in order to get things to turn out right. Figure out what you really want. Don’t try to get it right all at once. To get where you want to go, put someone in charge of managing finance.

Decide what it is that you want and put it in writing. If it’s in your head, it’s hard for everyone around you — customers, employees, vendors — to understand and support your vision. Share what you want to accomplish in writing.

Things will change. When they do, you can make adjustments. Putting goals in writing makes it easier to measure the impact of changes and identify opportunities to improve.

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To address this reader’s concern, let’s get specific. Why is payroll up? Because work gets done before a client is invoiced? Or are costs up this year but invoices not so much? In the first case, things may get better. In the second case, things will get worse. Knowing the difference is crucial to fixing the problem. In the first case, ask customers for an upfront payment to cover costs of ramping up the work. In the second case, lower the payroll costs by getting more efficient, lowering the work standard or raise prices to get the ratio back in line.

What do you want in your business? Good customers? Great support? Highly trained staff? Up-to-date equipment? Well-delivered product or service? Raving fans? Top-notch quality? Cash flow? Enthusiastic employees? Efficient processes? Set a specific measure for each item you want to achieve.

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Develop metrics for each of your performance items. For example, score customers against “good criteria” (value your work, pay on time, send you lots of business), and categorize customers from 1 (top customer) to 4 (worst customer).

Look at how your company performs at present. What percent of customers are in each of the four categories, from top to worst. Decide how you want to turn that around.

Interrelate measures. For example, compare spending on new equipment with productivity. Figure out how to measure error rates and then compare it with customer profits. Find the linkages and disconnects.

Make adjustments one at a time to find out how one change impacts other areas. For example, make an investment in training and see if it delivers results in customer satisfaction, productivity and profit scores.

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Avoid the temptation to “bet the ranch” by trying for big wins. Instead make small moves, measuring results and continuing to follow those that deliver. For example, to adjust your quality goal, get slightly more aggressive (or back off, depending on whether you’re trying to go up or down) with activities related to quality. Then measure to find out if customer satisfaction scores change.

Set goals for profit allocation. Amount “A” pays for taxes, amount “B” goes to debt reduction, “$C” is reserved for employee performance bonuses, “$D” is committed to investing in infrastructure, inventory, training, etc., “$E” goes to shareholders. When you have a plan for how profits will be used, you’ll be less likely to spend haphazardly or wastefully as money comes in.

It’s not enough to have a plan. The plan needs a guardian — a defender, a protector, a keeper — someone who keeps watch, fights for all aspects of the plan and who ensures that everyone else plays as agreed. Your guardian plan has to have authority to influence and take action. It’s not enough to declare a direction, they have to be able to lead and drive the organization forward.

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Looking for a good book?
Try “25 Need-to-Know Management Ratios” by Ciaran Walsh and Stuart Warner.

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