By Kenneth Surbrugg, Director of the Center for Entrepreneurship at Missouri Southern State University
“Direction is so much more important than speed. Many are going nowhere fast.” – Unknown
Many entrepreneurs are scrambling for more time and for more resources. With only a limited amount of either, business owners and managers are forced to make quick decisions in the hopes of maximizing returns. This could mean maximizing their profits, employee satisfaction, or business standing within an industry or community. But making decisions based on incomplete data, or under a time constraint, can only complicate these decisions. But what if the entrepreneur had a clear idea of their direction and then developed a few key performance indicators that guided the business’s time and resources to make better informed decisions?
I worked with a business owner several years ago, and during our conversations they were frustrated because the company was experiencing a decline in gross and net margins. Every quarter it seemed like the owner was getting more frustrated with making less and less money. Sales were strong — and even growing. So, what was happening? It turned out the owner was compensating employees based on sales commissions with no regard to overall store profitability. The sales staff did not know, or understand, the difference between the two, so they continued to discount prices in order to generate commissions. What the owner wanted was not in line with how employees were compensated. Once light was shed on this situation, changes were instituted and everyone was on the same page.
In another instance, an entrepreneur that I worked with was frustrated with the lack of growth in their business. Meanwhile, a regional competitor was growing by double digits. I learned that the business owner was hiring individuals, but failing to train those new hires, leading to their frustration and evident lack of growth. The entrepreneur wanted to catch up with the regional competitor but did not have the operational structure to make this happen.
In looking at your business, what are your two to three key performance indicators for success? Is it sales volume, profit margins, customer satisfaction, or employee satisfaction? Are the goals of the firm in line with the owner’s expectations? Are proper investments being made in business resources and activities? Is the business on the right track or do you need to adjust resources?
In a recent conversation, I asked a small business owner what they used as a measure of success. They laughed and said keeping the lights on and staff paid. But then I asked what real success looked like to them. They didn’t have an answer. The owner was so focused on the “now of the moment” that they had not thought about real success. I then asked the question again and listened. What they wanted out of the business was not what they were getting out of it. Instead of a business, they had a job. So, we put together a simple goal list and then discussed ways to measure performance against those stated goals. We established a few key performance indicators that the owners could use to quickly measure their progress and use as a basis for their decisions.
Survival is a common goal of many startup businesses. That is a noble goal to pursue, but how does a small startup survive? Does the firm have sufficient cash flow? Is the marketing building initial and repeat customers? Is the business maintaining expenses? Are projections in line with actual performance? These are the types of indicators that an entrepreneur can establish for their startup company.
For older, more mature businesses, the list of questions to consider will be slightly different from those questions for startups. Are HR practices rewarding the correct behavior? Can the company expand into new markets? Is the firm maintaining margins and are those sufficient to grow the firm? Are there opportunities to acquire a rival firm? These questions and answers will help you determine your key performance indicators.
Businesses exist to provide value to their customers in order to generate a profit. This leads the business forward in a certain direction. Is the business going in the right direction or is it going nowhere fast? Jim Rohn said, “It is the set of the sails, not the direction of the wind that determines which way we will go.” Now is the time to check your sails and make sure you are heading in the right direction.