The Importance of Measurements
The mythical business broker Brad Beancounter analyzes businesses that are for sale to help establish a sales price. Naturally he reviews normal financial reports such as Profit and Loss Statements, Balance Sheets, and Cash Flow Reports but he goes farther and deeper to discover what a given business is really worth. This takes using metrics that are not on normal accounting reporting statements or forms.
In talking to businesspeople about their company’s performance, the most common form of measurement I hear is sales volume compared to the previous year. While sales comparisons are an easy and valuable tool to measure overall performance, they are not very helpful in determining internal performance or value of a company.
Business owners should be constantly looking at many performance factors and those who are planning on selling within a five year window should discover parts of their businesses that might add to or subtract from the value of their businesses.
Depending on the type of business, different measurements may be important and should be optimized to the greatest amount possible.
• Retailers use “Sales per Sq. Foot” to compare sales density (how many dollars of merchandise are sold from each square foot of space) against industry standards.
• Distributors, retailers, and manufacturers use “Inventory Turns” (how the investment in inventory will last without replenishment or how quickly it can be turned into cash).
• Manufacturers use a method of measuring production time versus production quantity (hours per 100 widgets produced).
• Sales organizations can measure “conversation ratios” (percentage of sales calls that end up in the prospect signing on the dotted line.
• Most businesses can measure efficiency by measuring “sales per employee.”
• On-line merchants measure the “Cost per Click” to determine the effectiveness of their marketing.
There are many more ways of measuring the effectiveness, efficiency. and salesworthyness of a business. Unless you have some basis for comparison, it is difficult to know whether improvements are being made. You might even need to invent some measurements to make your business more profitable, more sustainable, and more valuable.
Larry Galler works with professionals, small-business owners, contractors, and entrepreneurs to increase sales and profits through better, more creative marketing and effective administration systems.