Defining Success
To grow successfully, you must define what you mean by growth. Is it merely to grow in sales? Or profitability? To reduce costs? To dominate market share in your niche? You must name the destination in order to begin getting people to move in that direction.
The goals must be precise enough that you (and employees and investors) can tell if your growth plan is bearing fruit. This means your growth goals must be measurable - which brings us to performance measures.
Performance measures help guide operations and improve ultimate results. In fact, performance measures become the ongoing dashboard to help determine how future growth can be obtained. Therefore, you should measure performance in all the key functional areas of the company as well as adopting overall quality measures.
What do you measure? You measure performance in functional areas. Key measures differ from business to business, but some typical ones are:
Sales and Administration
- Accounts receivable (30-60-90 days)
- Orders booked (dollar value)
Service
- Delivery response time
- Percentage of on-time deliveries
- Response time on customer queries or complaints
Manufacturing
- Production cycle time
- Unit production cost
- Equipment downtime
- In-process inventory
- Non-value-added labor
Quality Control
- Defect rate
- Fulfillment accuracy
- Repeat orders
- Percentage satisfied customers.
For most entrepreneurs, however, success ultimately comes down to some well known financial measures such as revenue, profit and debt. But as the company grows and numbers rise, important financial ratios (where financial results are compared to other financial data by dividing one by the other) track the company's financial health.
Key ratios are:
- Working capital ratio
- Quick ratio
- Debt to equity ratio.
Income Statements: Vertical Analysis
Take any single expense item in the income statement and divide it by total sales. This tells you the proportion of revenue that this expense is eating up. Comparing consecutive periods tells you whether the expense is becoming a bigger or smaller drain on cash. You will soon identify your biggest variable costs (costs that change and are not the same every time) and you will develop some realistic goals for cost containment.
Balance Sheet Ratios
Some basic calculations allow you to compare companies' financial strength over time and to other companies in the same line of business. Aim to improve these measures and meet or exceed those of similar companies.
Measures the ability to repay debt due in the next year. For every dollar of debt there is this amount of dollars in current assets.
Measures the ability to repay debt due in the next year with cash, liquid investments and accounts receivable.
Compares owners' investment to amount borrowed from banks and suppliers.
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