Are You Watching the Wrong Business Metrics?
When you come to the end of the quarter are you watching the right business metrics? Smart businesses begin by looking at their revenue to see if their revenue is on target for the year, then ask the question, “are we going to make it?”
While revenue is a good past performance business metric, it is not a predictor of things to come. Too often I see business owners watching their revenue and getting frustrated because they don’t know how to fix the problem when it’s low!
If you get advice and council from your accountant, this might be part of the problem. An accountant only can only tell you what happened. The good ones might tell you about problems, but they can only tell you in a general sense where to focus. For example, “fix your sale, fix your throughput, fix your marketing” etc.
It points you in the right direction, but what do you do next? The problem with watching revenue and other financial indicators is they only show you what happened. Now you’re left to react to a problem instead of preventing it from occurring in the first place!
Using Business Metrics to Predict What Will Happen!
Ok, so how do you predict the future in your business? Easy, by understanding the cause and effect of your operation by watching your business metrics!
I’ve taught how to predictively manage business for nearly 2 decades, then back in 2004 I create the revenue engine model. A method so simple for predicively managing a business that a high school student could use it!
Watch the video below for a quick conceptual understanding of the model and how to apply it.
Now let’s see how this approach allows you to be more predictive in your business.
Let’s begin by looking at your revenue from your financials. Is it too low, too high, or just right? If it’s too low, then let’s use the model to see why.
If there isn’t enough revenue most people jump to the conclusion that there aren’t enough sales. While this may be true, you first need to know how many more sales your operation can handle!
Examples of Using Right Metrics to Increase Revenue
One of my manufacturing clients wanted to grow their revenue. So I asked, how much capacity do you have in the factory? They said we’re nearly at capacity now. So I asked, “how do you sell more if you can’t fill the orders?” The lightbulb went on, and we put a plan together to increase their capacity.
Do you see the predictablity of this approach? In the video you saw we calculate business metrics by working your operational cycle backward. So, you know your available resources before you begin building your sales plan.
If you do have capacity, then you look to the sales business metrics and build a sales plan to fill the idle capacity? Then you look at how much more marketing you need to generate the leads required to increase sales.
Now, if you follow the process as it is laid out here, do you see what you’ve created? You’ve defined your targets business metrics all along your revenue cycle!
In another example, a service client used the method to predict their operation. We saw their business metrics go down and ask the questions ahead of time. Then put a quick plan in place to get the numbers back up. Within weeks they would see things turn back upward and never see the downward revenue result on his P&L!
How You Can Apply Predictive Business Metrics
But do you see, using this approach allows you to see it before it happens. Now, you can proactively do something about what’s happening instead of reacting to theresults months down the road.
Now, you can monitor your predictive business metrics day-to-day, week-to-week, month-to-month to see if you are hitting your marketing targets. If not, guess what, at some point down the road your revenue will be down.
Wouldn’t you like that kind of management control over your business? You can applied our Tuning Your Reveneue Engine management model. Click to find out more about how you can get a FREE Revenue Engine Performance Checkup and use this management approach to more profitably manage your business no matter where you are in your business growth or what time of the year.