Answer of Dale Muehl of Wipfli, Ullrich Bertelson
Running a business successfully is like taking a journey: you need a destination (objectives and goals) and a well-thought-out plan to guide you there. Along the way, you must continually monitor your progress to make sure you’re still on course.
Assuming you’ve determined your company’s destination and have a plan in place, the first step in establishing an effective monitoring system is to identify the key financial and operational indicators for your business.
Once you’ve identified your operation’s most critical indicators, you must set goals for each of them. To set those goals, consider several factors: the company’s past performance, developments that may cause future performance to differ dramatically from historical results, and benchmarking the performance of your company against direct competitors and others in your industry. The relevance and importance of those factors will vary depending on your company’s particular circumstances.
After you’ve determined indicators and set goals, you need to develop an efficient system for monitoring your progress. Some of the information you’ll need to analyze might be available through your existing financial system; a number of the software products currently popular with small businesses do a pretty good job of reporting such data. To obtain information that’s not being captured, custom reports can often be developed. If your system does not support custom reporting, other programs such as Microsoft Excel or Access can be used in conjunction with your software to generate the needed information.
Determining key indicators, setting goals and monitoring progress are meaningless actions if they are not utilized in the daily management of your business. Timely information on actual performance along key indicators compared to goals for those indicators needs to be generated and communicated to the appropriate employees. Those employees also need to understand their individual level of authority and degree of responsibility for monitoring progress and attaining goals. When there is a significant variance in actual performance versus your goal, either positive or negative, the cause should be determined immediately. If the variance is positive, the cause should be incorporated into the company’s plans when possible to enhance future performance.
Answer of Dave Bauer of Virchow, Krause Business Strategy Group
A CEO needs a well developed performance measurement system centered around four main principles.
The benefits to a well-structured performance measurement system are:
For starters, the measurements should be designed around the overall strategy and the resulting strategic objectives. This centers the information flow on important areas of the business and removes the “noise” that too much information can create.
Second, the measurements should be both activity based and results based.
Activity-based measures provide feedback on whether the desired activities are occurring. Results-based measures provide feedback on whether the activities are generating the results theorized to occur. For example, a CEO may make the assumption that sales could increase if the company would spend more time with its independent dealer network, educating the dealers on the company’s products and their superior characteristics.
The performance system would measure the amount of time the company spent with its independent dealers (activity), as well as the resulting sales through the independent dealer network (results).
If the company spent more time with the independent dealer and sales did not increase, the CEO knowing this could then act on this information. The CEO would know that the strategy was either flawed, not implemented correctly, or that market variables had changed. The CEO would then re-examine the problem and may conclude, for example, the real problem is not the independent dealer network, but product design.
The third principal is discipline. An employee, usually the CFO or controller, must take ownership of the performance measurement system and be responsible for the collection, integrity and timely disbursement of information.
The fourth principle of a good performance measurement system is that it be both easy to understand, and that the data not be overly burdensome to collect. The CEO must know how the measurements are being made and what information they contain.
In addition, a company does not want the collection of data to interfere with their efficient business processes. Data can usually be captured either electronically or manually in an effective manner.
May 1998 Small Business Times, Milwaukee
