Assessing Your Success

You will have to assess your success periodically. Different businesses will emphasize different measurements of success because of how convenient it is to do so in a relatively simple way. Even non-profit organizations need to have measurements to assess their performance. Let’s examine key performance indicators (KPIs).

A key performance indicator is a particular indicator or measurement of an organization’s performance in some area of its operation. It is a general concept, with different emphases depending on the type of business and goals of the firm.

One type of KPI might be financial ratios that can help to determine how effectively and efficiently a business is operating. This information is usually best benchmarked against a similar business, similar in company size or industry, to make sense of it.

For example, the return on assets (how efficiently the firm uses its mainly non-human assets) of a small business might be much higher than that of a big business without any regard for practical efficiency. But the most common KPIs are measurement and reporting of sales, profits, and costs. These measurements are what are most likely to be found in a small company. If you get into larger or more complex businesses or industries, you might encounter KPIs like sales per square foot or dollar sales per employee.

The business owner should sit with his accountant or an experienced businessperson and discuss, based on the nature and stage of the business, what KPI might be useful at the time. He should determine how to get about three periods for comparison. For example, in looking at sales for the second quarter of the year, he can set side by side:

Sales in Qtr 2 Sales in Qtr 1 (the prior qtr) Sales last year (Qtr 2)

In this way, he can see how well he has just done, how he did the period before, and how he did during the same period last year. Important bits of information can evolve.

For example, if the business is selling greeting cards, months with dates including Mother’s Day, Christmas, Father’s Day, and so on will be expected to generate more business. The business operator should not expect October’s business to be as high as December’s. Without much insight into the greeting card business, I would guess that one expects October’s sales to be at about the same level as August’s—unless the business is new and one expects growth month to month as the name gets established. If October’s sales are higher than or close to December’s, there is a need for some critical thinking about the business; it might suggest that the business is declining in some way. Other possible reasons for December’s sales to be lower than October’s are equipment breakdowns, industrial action (strikes), raw material supply problems, problems with large customers not ordering, disasters causing transport and delivery hitches, etc.

These numbers about the business will impact you differently, depending on your role or your location. Many of the observations mentioned would not be surprises to the management. Yet a shareholder reading the information online might see some news that will affect how he or she views the investment—is it properly managed? So what you can see is that information will have relevance when comparisons are made and when explanations are given.

One key success benchmark is the actual plan or intention from the start.

What did you set out to accomplish?

In this regard, a fourth set of numbers would be needed for the example given above. What were the budgeted sales for the period?

Fundamental targets on sales, profits, number of customers, margins, bad debt, costs, expenses, etc., can be planned and assessed periodically. Year-to-year comparisons are vital to check how business realities are changing and how the business is learning and adapting as time goes by.

You cannot manage effectively what is not measured. A tracking system is driven by documented plans and procedures backed up by collection and analyses. Information must be relevant, have regular frequency, be current, and be specific so that there is no ambiguity when the stakeholder reads it. These requirements make it important for the small business to implement software to capture and manipulate data because that approach will be most efficient.