Tuesday, March 16, 2010

There Is More to Your Business than the Finances!

There are many ways to define success in the business world but most small business owners tend to look at financial statements and key financial ratios to determine how well they are doing. While it is important to understand your financial statements, and to use them as a management tool, there are equally important pieces of information that you may want to measure to determine overall success.

In the early 1990s, Harvard University professor Robert Kaplan developed the Balanced Scorecard as a means of measuring key success factors that cover not only the financial aspects of the business but it also measures success in three other components of a business: The customer component, the internal business processes component and the learning and growth component. Professor Kaplan proposed that each of these components should be measured, just as you might measure your financial status, by using metrics you have identified as the key drivers in your business. After all, when you get an annual physical exam, the doctor doesn’t just listen to your heart beat, he/she looks at the whole body to determine overall health. Why should your business be any different?

You can’t generate a profit over the long haul if you do not have a good product or if you frustrate and drive off customers and employees. While the financial analysis of your business may give you clues of something else happening, the financial statements won’t tell you why customers are being driven away.

However, if your business can identify key drivers that measure customer satisfaction, you can begin gathering metrics that will tell you whether you have loyal, repeat customers. For example, you may want to track the gains and losses of customers, complaints, market share relative to competitors and repeat business. You may have difficulty implementing a means of measuring your success in this area if you do not maintain a customer tracking system so your first step might be implementing such a system.

Satisfied customers are the result of producing reliable and consistent products and services. For this reason, you also want to measure your internal processes to determine if there is any way to improve on your cycle time for key processes, to reduce delivery mistakes, to reduce recalls, or to improve safety during production.

Finally, your company’s infrastructure needs to undergird the strategies and goals that you quantify in the financial, customer and internal components mentioned above. This means that you need to develop a strategy and a means of measuring the levels of knowledge achieved through training and education. You might also want to measure the increased capacity that you might gain from improvements to technology and to the work environment.

If you want to do a little reading about some of these concepts, you may want to pick up ‘Keeping Score’ by Mark Graham Brown. Needless to say, the overall health of your business is dependent on a number of factors. The guiding principle behind the Balance Scorecard approach is ‘what gets measured gets done’. Research suggests that those companies that measure their performance out-perform those that do not, so you may want to give some serious thought to developing metrics for your business that will help you meet your business goals.

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