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Understanding Cause and Effect: What Do You Measure?

January 27, 2011 By 2 Comments

When you need to make changes in your business to improve performance where should you start?  That is a great question.  The problem is often business owners and managers don’t have the right information to make changes.  So, they arbitarily change things without understanding the effect of their changes on the revenue engine.

Here is a case many companies may be familiar.  In the recent economic downturn many business cut marketing because that seems to be one place they were spending a lot of money.  But, what is the effect of cutting marketing?  A decrease in leads.  This in a time when the number of leads that it takes to create a new sale is going up.  The results: an even bigger drop in sales ultimately putting the business at even more risk financially.

Monitor the right metrics to see cause and effect.

Identifying these metrics can be time consuming and difficult.  Here is a list of critical values you should be tracking for each stage of the revenue engine no matter what business you are in:

Operations
Sales
Marketing
· Total Revenue for Period
· Close Percentage
· Leads per month
· Maximum Capacity for Your Business
· Number of Sales per Month
· Amount of time spent marketing
· Total Revenue Generated at Maximum Capacity
· Average Revenue Per Sale
· Current $$$ spent on marketing per month
· Cost to Add More Operational Resources
· Cost to Add More Sales Resources
· Cost to Add More Marketing Resources

If you don’t currently know these numbers for your business consider it a red flag. Your business is at risk and you may not even realize it!

Analyzing Your Revenue Engine

Once you have these numbers, analyze your revenue engine from the back to front of the cycle identifying choke points along the way. First, make sure you have set a revenue goal for the year.  Then determine if you can get there from your current position.
Review you operations to verify the maximum revenue you can generate with your current resources. Compare this number to your revenue goal.  If you cannot meet the goal you may need to add capacity.  So, what will it cost you to add more capacity when you need it?
Next, review what level of sales you require to meet your revenue target.  Again, do you have the sales resources needed to support the sales goal?  If not, what will it cost you to add sales capacity to meet your goal?
Finally, look at how much marketing is needed to generate the leads to support the sales efforts.  If your current marketing cannot support the goal, what will it take to improve your marketing, or cost you to add enough marketing support to reach the goal?
Using this approach helps you more effectively set and prioritize the right objectives for your business.  You will find that it will help you make the correct cahnges and strategically focus on the right activities that provide real revenue impact and profitable growth.
Do you look at your business this way?  If not, how do you arrive at the information you need to make these decision?
Click here to find out how to get a FREE Revenue Engine Performance Checkup.  It will give you the insight to make more informed .

 

Copyright ©2011, 2009 Dino Eliadis

Filed Under: Operations, Planning Tagged With: , ,
About Dino Eliadis

Dino Eliadis has over 25 years experience in creating and leading high performance teams and organizations. His talents spans many different industries where he focuses on assisting small business owners to make measurable improvements in overall business performance thus increasing their “book value” by Tuning the Revenue Engine. The result: increased productivity and improved revenue growth, leading to maximized profits.

Trackbacks

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    September 21, 2011 at 6:21 am

    [...] which distract the business owner from the real variables.  The reality is there are only a handful of variables that tell an entrepreneur the health of their business and where he/she should be focused.  But [...]

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  2. Predicting Business Success – Success Step 5 — Your Small Business Growth says:
    January 31, 2012 at 11:55 am

    [...] what do you monitor?  I’ve written several posts on this topic.  I recommend that you read Understanding Cause and Effect: What Do You Measure?; Poor Cash Flow – 5 Things That Could Be Causing It; Is Your Revenue Underperforming?; and [...]

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