THE METRICS OF YOUR BUSINESS: BY CHARLES VALENTINE
It is often said, “What you do not measure, you do not control.” As entrepreneurs we have the freedom to set our own targets and metrics. Unfortunately, that same freedom can often cause us to neglect to review our own performance. Since we are by definition, in control, our excuses for missing targets is acceptable. We may not say that, but if we are honest, this is the attitude we often take.
Since we are involved in all decisions, we consider past decisions to be correct based on the information available at the time. We could use our freedom in another matter and know that when we review our performance, we have the freedom to make the changes necessary to improve. Choosing the right metrics and reviewing them is key to our long-term success.
Any business owner looking to advance to the next level must understand the metrics that affect the performance of the business. There are many ways to look at your business but it is vitally important that entrepreneurs are honest with themselves, pick metrics that they understand, and that they are truly willing to measure. Keep it simple and focused. Defining a metric is similar to telling a joke–if you spend too much time explaining it, then it probably won’t work. Some metrics, such as fixed and variable costs, can seem very simple but are often rife with ambiguity. Fixed costs are normally the items that remain the same month after month, or items that do not vary in regards to the amount of business that you have, or do not vary with sales. Fixed cost can include rent, management salaries, overhead, or long-term contracts, such as marketing or shipping. Obviously, even these fixed costs are only fixed for a period of time. Variable costs are items such as crew costs and raw materials. Fuel and materials for any given job are also variable costs. Often there are grey areas for items such as crew cost if the crew is on salary and they get paid regardless of the amount of business. Is this truly a variable cost or has the cost of the crew become fixed? These metrics, of course, can vary with each business model and how the company is managed.
Regardless of how the costs are allocated, it is critical that every cost is reviewed and that the impact of these cost metrics are also reviewed. Cost of goods as a percentage of sales is often a critical metric that should be measured and reviewed. The cost of goods as a percentage of sales is a combination of many factors and not simply the price. The yield of the product, along with the efficiency of the workers, is critical as well. In fact, often the price is strongly considered, while the efficiency and yield are not taken into account. As an example, if the price of your product is $1.75/lb. and you have a 10 percent waste, you would end up with the same cost of goods if you paid $1.93/lb. and only had five percent waste. The same goes for yield 4,000 bd. ft. at $1.75, the same as 3,800 bd. ft. at $1.93. A very small change in yield ends up creating a large change in material cost. When we look at labor, we have to look at both the cost per man-hour as well as the efficiency and the amount of work completed. If we have to take 10 hours to do an eight-hour-job, our cost of labor has increased 25 percent. Sometimes these items slip through the cracks because there may not have been another job awaiting the crew. But from a business management point of view, we need to look at this as lost opportunity cost. Another job could have been started with those two hours or we may not have had to pay overtime to get the job done. In addition, as we view our business in the long term, we may see the need for another rig and another crew, when in fact, it could have been accomplished by simply having our current crews be more efficient.
When we look at things like overhead we also need to consider when we should hire, or whether it would be best to have contract labor take over internal tasks such as accounting or marketing. As the business grows, do we need to have a manager for the crews or a head sales person? All these things are critical and must pay for themselves. How can we determine the performance of the business if we are not measuring these items and determining if they are paying for themselves? When we evaluate our sales performance, do we include margin or simply sales dollars? Do we look at each job and see if the final job performance met the bid? Is our material meeting the yield expectations that we utilize for our bids? Are our crews meeting the timelines that we utilize for our bids? Are we utilizing the best numbers? Are we competitive with the targets we set?
Good metrics will drive the direction of the organization, provide focus for employees, help make decisions, and push performance. Define your metrics in the simplest way possible, and understand, as a group, that the definition of a metric can change and improve over time. Create metrics that will help your business understand where it has been, where it is going, if something is going wrong, and when the business has met its target. You’ve heard the phrase, “Bad data in, bad data out.” The metric you want may need data you don’t yet have. Be prepared to invest in harvesting the data necessary to drive your metrics. Rather than measuring easily achievable goals, set metrics that challenge the company, that push your business to improve and succeed at new levels of growth or efficiency.