How do you know if your business is healthy?

Sure, you’re monitoring your revenue, expenses and profit closely. Most likely you’re worried about the numbers and would like to be a bit healthier – but the economy’s still sputtering along, and customers are holding back.

There’s a problem with focusing on revenue and profit: They’re too comprehensive, and too late. It’s like trying to figure where to go on vacation just by looking at your tax return.

This is where you need to develop a solid set of Key Performance Indicators, or KPIs. These are measures of progress in specific parts of your business which are strategic and influential.

Let’s suppose that you’d like to drive more customers into your business. There will be four parts to this process:

  • Plan: Before you start a new investment to attract customers, you’ll create a plan. It’ll include the actions, investments, milestones and analysis of potential problems.
  • Activity: To implement the plan, you’ll take some kind of action. You’ll refocus employees, change your advertising budget, implement a new campaign and so on.
  • Outcome: As a result of this activity, you’re hoping to see an increase in customers, and the amount of money they spend with you. You may also want an increase in repeat customers, improving the retention rate.
  • Result: The bottom line of this whole effort is to improve customer revenue, short-term and long-term.

If we just look at customer revenue, it may well be many months until we know that progress has been made. By that time, you’ve wasted a lot of time and money, perhaps even with a negative result.

Let’s look for some key measures that would help us know whether we’re going the right direction much earlier.

  • Plan: Did we create a plan that is well thought out, which includes all the relevant parts of the company, and gives us sufficient time to work out the issues? Did we have someone review it who will give us excellent feedback? Will we be able to afford it? Have we planned for the most likely contingencies?
  • Activity: Are we on track with implementing the plan? Do we periodically ask tough questions about whether it’s working or not? Do we know the difference between real progress, perceptions and wishes?
  • Outcome: Are we seeing an increase in customers? Do we have evidence that it’s due to our efforts? How do we know that customer loyalty is improving, that we’re not just getting a bunch of one-time-only buyers? What’s the average spend of each customer?

I wouldn’t suggest that you create a constant frenzy of monitoring and measuring. After all, the purpose is to get customers, not to generate a whole lot of overhead work.

The next step, then, is to select which of these questions are absolutely key. For example, you could decide that having the plan reviewed by a knowledgeable outsider is crucial. By doing that, it’s quite likely that you’ll be asked all the other tough questions, and you’ll most likely have a robust and reasonable plan.

The neat thing about a measure like that is you only have to do it once. It’s a milestone. Yes, there’s some overhead, but the return on that investment should be extremely high.

For monitoring the activity, you might focus mostly on getting all your employees aligned. Maybe you’re confident that, once trained, they’ll be motivated and able to do the rest of the steps. Or perhaps you’d be more comfortable with a formal project plan, a single person who’s responsible for it and reviews it twice a week.

It really does depend on your goal, your organization and how critical this is to your success.

I’d recommend that you create several key measures for the outcome. If you focus on the outcome, it’s likely that your employees will work hard to achieve it. And if you indeed get more loyal customers, spending more, the financial benefits should fall into place naturally. Look for a way to monitor these, publicize the progress to your employees every week and have regular discussions on how to improve progress.

It’s the way that you’ll know you’re making leaps forward in your business results.

Carl Dierschow is a Small Fish Business Coach based in Fort Collins. His website is www.smallfish.us.

Copyright © 2012 Northern Colorado Business Report by Biz West Media.
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