April 2010: A Note from Jeff Mack
The Bottom Line: Clean Windshield Leads to Significant Horsepower Boost
We are all familiar with the standard tools for measuring the performance of our business; namely the balance sheet and the income statement. And if we are halfway decent backyard mechanics at working on the business, then we also pay attention to our bank balances and free cash flow. And if we are journeymen, we might be using any number of balance sheet ratios for analysis. However, all these tools are akin to the rear view mirror in our car. They tell us what is behind us, or in other words, what has already happened. Now don't get me wrong, the rear view mirror is an indispensable tool, particularly when you put the transmission in reverse.
I am assuming, however, that all of you want to keep your business moving forward, and therefore have your transmission in drive, or perhaps even overdrive. That being said, the front windshield is a much more valuable tool for navigating the vehicle where you want it to go than is the rear view mirror. And the same can be said for our businesses. The windshield enables you to see where you are headed, judge when you might get there, and make any course corrections that might be necessary. We should be relying on the windshield to guide us at least 90+ percent of the time.
What's the condition of your business windshield? Is it crystal clear and revealing? Or is it cracked, scratched, and caught in a torrential downpour with worn out wipers? If it's the latter, then common sense says it's time for immediate corrective measures.
What are some corrective measures that can be used to improve your windshield's clarity so that you can see where the business is headed? The place to start might involve identifying the leading indicators for your specific industry and business. Following are a few examples.
What are the key processes and actions in your business that drive profitability and produce the results on the balance sheet and income statement? Perhaps it's any number of these common activities.
| Operations | Business Development |
| Staff utilization and production | Marketing impressions made |
| Operating margin | Marketing % of revenue |
| Revenue/FTE | Prospecting calls completed |
| DSO (Days Sales Outstanding) | Proposals presented |
| DPO (Days Payables Outstanding) | Lost orders |
| Service margin | Shipments made |
| Overhead % of revenue | Order fill rate |
| Service calls closed/day | On time orders shipped |
| Time from closed call/order to invoicing | New customer adds |
| Time from quote to cash | Average new deal size |
| Job estimate vs. actual (time/budget/scope) | % of revenue from new customers |
| Estimating accuracy | Forecasting accuracy |
| Work Backlog | Sales pipeline |
Are there correlations, indexes, trends or statistical measures that impact your business directly or indirectly? If so, how much warning do they provide and what impact do they have? Can your industry associations provide insight into these leading indicators? If not, there are also organizations that specialize in analyzing and forecasting trends in a variety of industries. As an example, check out the Institute for Trend Research.
Regardless of where you find your early indicators, identifying and measuring them can not only frequently enable you to take early corrective action if need be, but can also shed light on what the real critical drivers and contingencies are in your business.
The odds are that your ERP or business management system is currently producing some of these metrics. However, the reality is that many of the critical measures for your business are probably not being reported. The good news is that your ERP system is likely tracking many of the core data elements necessary to provide meaningful information. However, it might be necessary to create additional reports or KPIs (Key Performance Indicators) to extract the correct pieces of data and present them in a context that provides clear visibility as to where the business is headed. In order to maximize the power of this information, you will want to ensure that the various key roles in your organization have access to the critical indicators needed for their specific scope of responsibility.
Once you have identified your specific leading indicators for the key roles in your business, give us a call at 425-820-6120 and we can help you find and unlock the critical information in your ERP system to help guide your business down the freeway toward a stronger bottom line.
Regardless of where you find your early indicators, identifying and measuring them can not only frequently enable you to take early corrective action if need be, but can also shed light on what the real critical drivers and contingencies are in your business.