A good measure helps manage business well

Most entrepreneurs will admit to struggling with discipline, routine and providing the evidence to justify their decisions. Why are measures needed when they already know instinctively what is happening in the business?

The KPIs, KRAs and balanced scorecards — aren't these reserved for the big corporate entities which have the people and resources to track everything? Or perhaps manufacturing businesses or those driven by quality standards?

Should all SMEs really spend time on measures beyond the basic financial reports?

It took 13 years for me to become a measurement nut in my business and — once hooked — there was no looking back. You literally can't manage people or a business effectively if you can't measure them.

Most of the metrics used in business are lagging measures. That means by the time you are looking at the measure, the possibility of it having an impact has already passed.

They typically include the financial reports that we perhaps get seven to ten days into the next month for the previous one. They tell us where we succeeded and perhaps where we didn't, but they are history.

They can be used to build up a pattern of results or a trend, but that will take time. It takes six data points to see a trend, so if you are only looking at your monthly financials, you'll take six months to really see a significant trend. There are all sorts of ratios and comparisons that you can use to make your monthly financials more meaningful. But they still aren't enough.

You need to establish some leading indicators of performance, something that gives you advance warning and something that you can impact. A great leading metric is the value of your sales pipeline (value of pending proposals) or the number of incoming enquiries or leads that you are receiving. Both will show a trend but also drive the potential for future business.

Another great measure in a business is a profit/x metric. Profit per square metre and profit per person provide an SME business with great insights on managing growth. Finally, find a critical number that you can manage daily. Something that you can easily record, track and report on, and one that gives you a crystal clear ‘snapshot' of how the business is doing.

The other side is to discover measures for each member in your team. This is where many companies over-complicate solutions and actually discourage employees. If you are being held accountable for a measure that you don't have total control over, it is easy to get disillusioned.

Many large and small companies have mastered the art of collecting data for company and individual measures, but then don't spend the right amount of time analysing or challenging results.

A powerful leadership behaviour to use with metrics is the "daily cringe". Ideal if you have a team driving towards a tough target that they can personally influence.

What should you be measuring in your business? Start by asking what is not working and then find measures to give you insights as to why not.

The writer is the CEO of biz-group, a corporate training and business strategy group.