Twice a year, in the budget and autumn statements, the Chancellor of the Exchequer has to give account to Parliament for the progress of his economic plan.
Successful businesses hold themselves to account against their plan too. Often monthly or quarterly. Both presuppose that there is a plan that has clear and SMART goals.
The reality for many small business owners is that the ultimate measure of success is their accountant telling them they have made a profit at the end of the year and then being able to take a dividend. The plan is essentially more of the same. There are few if any real metrics in place with which to assess whether goals have been achieved.
At best this leaves the progress of the business during the year down to gut feel and intuition. Leaving it vulnerable to market changes, competitive action and other events. At worst, it is like a rudderless ship drifting on the ocean where the destination is uncertain and sand banks and other hazards lie in wait.
The chancellor’s progress is measured by external bodies, including the Office for Budget Responsibility (OBR).
A business owner needs to create their own accountability measures. These measure will provide a yardstick for the progress of the business towards its goals.
If the goal is to grow profitably then the following 3 measures may be appropriate:
1 – Sales revenue
Sales is simply defined as income from customer purchases of goods and services and should be measured versus the equivalent period in prior years. Everyone is happy when the numbers keep going up, but the data needs to be analysed for deeper meanings and trends.
2 – Customer loyalty and retention
You build customer loyalty by treating people how they want to be treated and delighted customers will buy often, buy in higher quantities and bring you even more customers!
3 – Gross margin
Tracking margins is important for growing companies, since increased volumes should improve efficiency and reduce the cost per unit.
The above are just examples. The key is to understand your own business goals and then set realistic but stretching targets. These need to be relevant to the plan and by which you can chart your progress.
As with the Chancellor, this is best done in a formal manner. Taking time with your fellow shareholders or management team to consider what the measures are telling you!