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Predicting Performance

Let us start by asking a few simple questions: When you evaluate your enterprise on a regular basis, what are the measures or key performance indicators (KPIs) that you use to determine the health of the company?  Do you focus primarily on net profit margins?  Solvency and liquidity or on the return on assets or equity?

The challenge with all these traditional, financially driven measures is that they look backwards, evaluating past performance.  Yes, an upward trend tells you something, yet it does not go far enough in measuring the extent to which a company is creating enduring growth in value.  In this article, we will discuss a  few insights that might help shift how you measure your company performance through the implementation of a measurement dashboard.

Drivers of performance

A measurement dashboard requires a comprehensive understanding of the drivers of performance  that enables your company to analyse, predict and forecast what will happen. This approach helps management track likely future performances and takes proactive and corrective action en-route.  These drivers are unique to your company and should reflect the value creation drivers of your business model.  For example, research and development, or plant production may drive the success of your company.  In that case, productive measures to use might respectively be ‘new products launched’ and ‘production line capacity’.

Your strategy sets the scene

Your strategy focuses on what you want to achieve and how to get there.  This strategy will directly affect the speed and complexity of your journey. The strategy will also have an impact on how your measures should best reflect those outcomes. Using the plant production driver, how would an aggressive international expansion strategy affect the ongoing measurement of your plant’s capacity to support growth?

A balanced view is vital

The board must monitor and review the business with a balanced perspective across the enterprise to ensure that all parts function in synergy.  As an example, you might assume that two good measures would be; high sales conversions and low staff wages.  However, if this is achieved with a high staff turnover and a lack of customer care due to low morale, the collective outcome may not be positive at all.  Always keep the bigger picture in mind.

People, operations, and finance

To achieve a  balanced perspective ensure that there is an appropriate mix of measures across these three areas; people (your staff and customers), operations (technical and business activities) and finance.

People measures could for example include employee turnover, customer database size, or sales calls made. In turn, operations measures could include product and service development, average delivery times, and quality assurance indicators.  Lastly, finance measures do not measure the usual KPIs – instead they should indicate how operational parameters are translating into financial performance.  Examples might include the average customer spend, cost of redo work and exchange rate variances.

Both art and science

You cannot take any of the above example that I have provided, simply drop it into your business dashboard, and expect magic.  You have to select indicators that reflect likely future performance, but also track the extent to which your team is delivering on the strategy your board has approved.  This requires absolute clarity on; your business model and how your company makes money, your strategy, and direction, and how your operational processes and systems can support the extraction of those measures that could indeed mean life or death on the mountain of your business expedition.

Next actions

If you are wondering how KPIs and a performance dashboard can be implemented in your business  to achieve increased profitability and long term enduring growth, it is time to contact either Arnold Scholtz, arnold@asl.co.za or Malan Botha, malan@asl.co.za for a first discussion about the unique drivers of performance in your business.

(This article was adapted from an article by renowned global entrepreneur and founder of the Sirdar Global Group, Carl Bates, published in the Entrepreneur Magazine SA – May 2015)