Measure Everything.

Last week I spoke to a friend, who just opened a retail franchise. As we spoke about his success and challenges in running his own operation, something he said struck me. As we talked, he mentioned that the franchise measures everything. I asked what he meant. He said that if its quantifiable, the company measured it. I may be wrong, but I seem to recall this was something Warren Buffett said about measuring everything was one of the keys to success in business. I just read a great article by ESPN about the Football Coach for the Kansas City Chiefs, Andy Reid. He is one of the winning-est coaches in the NFL. Doug Pederson, the Philadelphia Eagles Coach said this about Coach Reid.

There's never a stone that's left unturned. Every stone has been turned over once, twice, three times. That's something people have talked about, but they really don't know the extent with Coach Reid. I go back to when I was a player. I was a quarterback in Green Bay, and he was the tight ends coach. One of the things he mentored me with that carries over to today is just the details of the work.

Coach Reid seems to measure everything, that's why he wins.

Measuring is important. Qualtrics, the subscription survey provider has built an billion dollar company around the need to measure customer satisfaction. A quote from them is:

Qualtrics offers a subscription software platform "that the world’s most iconic companies use to close experience gaps and deliver breakthrough results."

They measure customer satisfaction to help companies provide a better experience for their customers.

But what does this really mean, “Measure Everything?”

There are lots of measures a business can do, some operational, some financial, some almost ethereal. The financial measurements are most likely the easiest with a plethora of Key Performance Indicators (KPI's for short). Here are just a few KPI’s which can be used to measure your company

• Working Capital: Measures an organization’s financial health by analyzing readily available resources that could be used to meet any short-term obligations.

• Operating Cash Flow: The amount of cash generated by regular business operations.

• Cash Rotation (365/Cash Cycle): The number of times the cash comes back to the organization for a period of one year.

• Cash Flow from Investing Activities: Shows the change in an organization’s cash position caused by investments, gains, or losses.

• Cash Flow from Financing Activities: Demonstrates an organization’s financial strength. Formula: (Cash Received from Issuing Stock or Debt) – (Cash Paid as Dividends and Re-acquisition of Debt/Stock) = (Cash Flow from Financing Activities)

• Cash Flow: The total amount of money being transferred into and out of an organization.

• Cash Conversion Cycle: Demonstrates the amount of time it takes for money invested in the organization to come back to the organization in the form of increased revenue.

• Accounts Receivable Turnover: The rate at which an organization collects on outstanding accounts. Formula: (Net Credit Sales) / (Average Accounts Receivable) = (Accounts Receivable Turnover)

• Accounts Receivable: The amount of money an organization is owed by its customers.

• Accounts Payable Turnover: The rate at which an organization pays off suppliers and other expenses. Formula: (Total Supplier Purchases) / (Average Accounts Payable) = (Accounts Payable Turnover)

• Accounts Payable: Shows the amount of money an organization owes its suppliers.

• Number/Percentage of Invoices Past Due: Invoices that remain unpaid after their due date.

• Total Expenses: Consists of the total costs an organization incurs during a reporting period (including marketing, sales, and operations costs).

• SG&A: The costs of operating an organization—including selling, and general and administrative expenses—are collectively referred to as SG&A.

• Sales Expense: Costs incurred by the sales department—including salaries and commissions.

• Marketing Expenses: Encompasses the total costs incurred by the marketing department, including advertising, salaries, research, and surveys.

• Inventory Turnover: The number of times an organization is able to sell off its in-stock inventory in a given period. Formula: (Sales) / (Inventory) = (Inventory Turnover)

• Cost Per Unit: The price to produce, store, and sell one unit of a particular product including fixed and variable costs of production. Formula: ([Variable Cost] + [Fixed Cost]) / (Number of Units Produced) = (Cost Per Unit)

• Cost Per Hire: The average cost of hiring a new employee, including advertising fees, employee referrals, travel expenses, relocation expenses, and recruiter costs. Formula: (New Hire Expenses) / (Number of New Hires) = (Cost Per Hire)

• Cost of Goods Sold (COGS): Represents the cost of materials and direct labor used to produce a good.

• Average Annual Expenses to Serve One Customer: This is the average amount needed to serve one customer. Formula: (Total Expenses) / (Total Customers) = (Average Annual Expenses to Serve One Customer)

• Customer Acquisition Cost: The cost to acquire one new customer.

• Cost per Click: Measures the cost of a pay-per-click advertising campaign (such as Google AdWords).

• A/B campaign testing: Measures the effectiveness of marketing campaigns

These are just of few of the myriad of KPI’s that can be used to measure your company.

Going back to last week’s discussion, my friend said, (he has a food business) we measure, time from start to bake, packaging time, from bake to counter time, etc. I have another friend who runs a behavioral health company. When I asked him, what matrix was most important, he knew immediately. He said, having 16 new patients each month. Do you know what are the important measures for your business? Are you missing something?

Once you’ve figured out what to measure (every business will have different measurement matrices), then it’s time to automate. The more you can automate your measurements, the more productive and profitable your company will be. You will be able to spot trends and anomalies before they turn into problems. Most companies are reactive and wait for the crisis before managing it. I call this management by fire drill. I have worked for many company’s that manage by fire drill.

The question to ask is, as the owner of the company or one of the key executives, when I come in the office, what do I want to see as a measurement each day? If you can answer that question and automate it, you will be well on your way to being a proactive company rather than a reactive company.

Have a great week.