Traditionally, accountants have reported business results using balance sheets and income statements. These statements include information that is particularly helpful for investors and credit givers. They also include important information for the management of the business to evaluate the financial health of the business. However, these statements are of results. In order for management and team members to better direct the business, the activities of the business need to be correlated with the results they generate.
Most of the activities to be measured should reflect how the business gives value to its clients and customers. The things that must be done right for the business to be successful can be called critical success factors. Measures that correlate to critical success factors can be called key performance indicators.
In their book Measure Up, Richard Lynch and Kelvin Cross suggest measures should be identified in the areas of quality, delivery, cycle time, and waste.
By measuring the activities in these areas, the team can evaluate alternative approaches to be more effective (doing the right things) and efficient (doing things right).
By sharing measurement information, the team gets feedback and focus. What you can measure you can manage; and, What gets measured gets done!
In the early 1900's, Frank Bettger became the leading salesperson for the Fidelity Mutual Life Insurance company. One of the ways Frank improved his performance was by keeping records of the results of his sales calls. 70% of his sales were closed on the first interview. 7% were closed after the second interview. Frank had been spending 70% of his time on calls after the second interview. He eliminated calls beyond the second interview and boosted his performance by focusing on more new prospects. Frank also correlated the amount of sales with the number of calls made. Frank managed himself by monitoring the value of his calls and eventually increased the value from $2.30 to $19.00. (Remember, in the early 1900's a dollar was worth considerably more than today.) This kept him focused on planning his time to maximize the number of calls made and allowed him to plan his income for the year by planning the number of calls to be made each week.
A machine shop started measuring waste by weighing a trailer where scrap was stored and posting the figures for the team members' information. The scrap expense decreased by $30,000. Later, the owner decided to stop weighing the scrap. Scrap expense increased again by $30,000.
In developing a business improvement program, the team must develop performance standards that can be measured. Implementing a measurement program gives substance and definition to plans that would otherwise be vague.
Would you like assistance in implementing a business measurement and monitoring program? Call (408) 918-3161 today for an appointment.
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