Performance Dashboards: What to Measure

Dashboards can have many different uses.  The specific departments or users of the data will determine what is included on the dashboard.  For example, a corporate accounting department would have a vastly different dashboard than a manufacturing unit.  While the accounting department would measure things like length of monthly closing, the accounts payable cycle or days sales outstanding, the manufacturing unit might measure operating efficiency, labor hours per pound of production and lost time to injuries.

In the same way that different groups within a large corporate setting will have vastly different dashboards, a small business will likely have a much different dashboard than a large public corporation.  And in fact, the dashboard of one small business will be different than the dashboard of another.

A dashboard is nothing more than a tool for improving performance.  As such, it must be created to monitor the most important measures of your individual company performance.  It is also important to remember that a business owner can only keep his or her eyes on a limited number of measures.  Careful deliberation on the keys to success of your business should be the items that populate your dashboard.

Another important consideration is the use of comparative analysis to artificial measures like budgets and quotas.  While a department or even an individual dashboard might contain comparative measures to quotas or budgets, a company-wide comparison to an artificial yardstick is usually not advisable.  Remember, a corporate performance dashboard should identify and measure the keys to business success.  Is comparison to a budget or quota really a key to your business success?  If the yardstick has been put in place by your primary lender and is a determining factor in the renewal of your credit line, then maybe it is.  If it’s a self-imposed yardstick, you should be careful of using valuable real estate on your dashboard with such a measure.

Copying the dashboard of another company will be no more effective at managing your business than using their financial statements to run your company.  Having said that, there are general categories that all small business owners should consider when compiling a dashboard; cash flow and profitability, operational efficiency, and sales and customer satisfaction. We’ll talk about each of these categories individually over the next several posts.


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How Fast Are We Going, Anyway?

Now that you’re actively collecting data and making measurements and attempting to improve your business, how do you go about reporting your progress? This is one of the most difficult decisions that business owners and manager have to make. What do we report, how should it look, how often should we update, and who’s going to do all this updating in the first place?

First, start with the most important measures for the unit being measured. That is, if you’re measuring your customer service department, then decide what are the few important measures on which we should concentrate for that department. If you’re preparing a reporting mechanism for the board of directors, then you’re going to look at the whole company.

You can only concentrate on a handful of measures at one time, so pick the three to six most important ones for the area in which you’re working and go from there. As you make improvements to one area, you can substitute another area that has become a bigger problem. As you get better at working with these data points and trends, you can add more measures.

One way to display the information is in the form of a dashboard. Just like in a vehicle, you have a dashboard with the few important data points that you need to successfully “manage” your transportation system. You don’t want to get a ticket for speeding, so you have a speedometer. You don’t want to run out of gas, so you have a gas gage. There are other gages on your dashboard showing the status of various systems in your vehicle. Some are gages, some only tell you when you have a problem, like the check engine light. And unless you’re Penny, when that light comes on, you need to check your engine. If the light is off, you can assume you’re engine is operating fine. Together, these different measurement systems indicate the status of your transportation system. And the real beauty of a dashboard is you can see it and understand the status of your system in just a glimpse. Similarly, your company dashboard needs to be arranged to use different types of gages so that it’s logical and displays the whole system status quickly.

Here’s an example of a corporate dashboard from computer networking company F1 Solutions, here in Huntsville. F1 ownership and management decided what was really important to measure and set their tech staff at programming the measures into an automatically updating system that displays their performance relating to response times and customer service.

Unless you’ve got a talented tech staff, you probably won’t be able to create a fancy dashboard like F1. You don’t need to either. For a bunch of tech guys, this is a problem that needed to be solved. You probably don’t have resources like this available at your company. What you need to figure out is how to display the information in a meaningful way that allows you to properly manage your systems with the least amount updating.

If you need help with your measurement systems, give us a call.

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Metrics, Measures and Men

There’s a saying in quality circles, “what get’s measured, improves”.  Do you measure performance at your company? I’m actually a big believer in this idea that you can’t improve what you don’t measure. “Metrics” is one of the key buzzwords these days and is thrown around by all sorts of people. Metrics is just a fancy way of saying measure.

Measuring isn’t quite as simple as that though, is it? What do you measure? What about issues which are tough to put numbers on? “We have a great measurement system, but we don’t really use it because it takes two days just to figure out the current measurement.”

First, every business is different. What we measure at my business will be different than what we need to measure at your business. Why is that? Well, for starters, I’m different than you. My business is different than yours. What I’m most interested in seeing improved will be different that what you’d like to see improved. The goals and plans at my business are not the same as at your business.

“You mean we don’t all measure the same thing?”

No.  What you should measure in your business is based on your own goals and plans. What you measure at the corporate Board of Directors level will be different than what you measure in your regional sales office, on the manufacturing floor, or in the human resources department.

“Wow, this is getting really complicated.”

No, actually, it’s quite simple to determine the issues to be measured. Drilling down to the root cause to collect the proper data for measurement can sometimes be a bear. But, identifying the major issues to be measured is actually quite simple. What do you want to see improved? What are your big performance issues? What do your customers/owners/managers/auditors/partners/vendors complain about? The real issue is getting your employees to change their behavior so that you can collect meaningful data to improve your systems and performance.

“What does this have to do with my employee’s behavior?”

Everything. Most times, data collection means that employees have to “tattle” on themselves. So the pressure is on you to create an atmosphere without fear, where employees can work on your business without fear of being fired. THAT, is where measuring is difficult. It’s not the measuring, per se, is hard. It’s changing employee behavior that’s really difficult.

We’ll keep talking about measuring for performance improvement. Next time I’ll show you a local company with an awesome dashboard and how they use it to improve their business.


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Store Management Complete

Store Management Complete, By Frank Farrington. Published originally in 1911, this version 1922 by Byxbee Publishing Co.
  

I found this little book  (it's 4.5" x 7.5") in an antique shop in Decatur, Alabama a few weeks ago.  I love books and couldn't turn down a nearly 90 year old instruction manual for running a retail operation.  It's a funny little book, but also very interesting in it's common sense approach to business.  For entrepreneurs, it lays it all on the line in the first sentence of the book.

"It is the man himself that makes or mars the business."

Couldn't have said it better myself.  Mr. Farrington goes on to say that a business can have every advantage, properly stocked shelves, great location, good price, excellent marketing and promotion, but if the business owner doesn't know what he's doing, he'll run it into the ground in no time.

It was really the last sentence on the first page that I found most interesting:  "A merchant needs to be an all around man, a man who knows much about many things, who can himself do any part of the store work in need be, in order to show an employee how it should be done, and a man who can make himself agreeable to people and exhibit a high degree of proficiency in salesmanship."

I think he just described a small business owner.  In modern language, someone who can wear many hats.  Doesn't that describe most any small business owner's job?  Before you can, in Mr. Farrington's world, become a financier, you have to start small and do most of the actual work yourself.  As you grow and develop your business into a real business enterprise, you can start to hire employees to do the actual work and you can manage the direction and finances of the business. 

As a financier, you are managing the investment that is your business.  As a merchant, you're managing the store and the people and doing much of the actual work.  Just like Horace Vandergelder, the grumpy half-a-millioniare merchant in Yonkers, New York in Hello Dolly, we envision a merchant with a tweed suit and an apron.  He's the classic business owner and manager.

This book is in remarkable condition to be 88 years old and is delightful in its language.  I'm sure I'll have much more to say as read Mr. Farrington's Store Management Complete.

Sins of Entrepreneurism

The dream of business ownership is like an addiction running through the veigns of entrepreneurs.  We crave the start-up and break out into cold sweats at the very thought of a new business opportunity.  When done properly, a start-up is a wonderful thing, flourishing with profits and cash flow.  When mangled and mismanaged, the beauty tarnishes and becomes a dirty needle driving us to a metaphorical over dose.

So what happens that causes us to lose our way and take what we thought was such a wonderful idea and turn in into such a mess?  For many unenlightened entrepreneurs, they take their eye off the contest and start coveting the prize.  Instead of focusing their serious intention on building an enterprise, they lose focus and just create a job.  

For some, being self-employed is just fine.  Just understand that being self-employed is not a business.  Being self-employed is still trading hours for money.   The dream of entrepreneurship for many is realizing fame, fortune, liesure, travel and a healthy cashe of possessions.  That’s the prize for creating a well-run enterprise.   Let me say up front that I too hope to realize those prizes.  There’s nothing inherintly wrong with any of those things.  But they only come at the end, after you’ve created the enterprise.  The problem is, many hopeful entrepreneurs take their eye off the start-up and start focusing on the prize, before the enterprise is even established. For these people, the prize becomes a poison and bitter reality instead of the comfort.

For these lost entrepreneurial souls, fame turns out to be the dog remembering you, for your family has long forgotten your face since they never see you.  Your fortune becomes a huge pay cut, the result of a poorly run business.  Your liesure has been traded for living at your office.  You trade your 40 hour per week corporate job for an 80+ hour per week self-employment nightmare.  Your travel has become nothing more than a mind-numbing commute from your home to your office.  Your possessions are not exotic cars and vacation homes, but accounts payable, credit lines and inventory.   

How did you get yourself into this nightmare?  For most, the answer is in conducting the proper research, developing a solid marketing plan and testing for viability.  This simple process would have told many business owners that their business model was flawed and needed adjustment.  Unfortunately, they never really did any business planning.   By focusing on the prize and not the process, these starters never really got started…at least not properly.  The process is not complicated, but you do need to follow it.  If you don’t understand the process, get some coaching, find a mentor, or read a good book.  That reminds me, entrepreneurs can buy my new book Business Start-up 101 by visiting www.BusinessStartup101.com or Amazon.com.  If you want to chat, drop me a line.

What Entrepreneurs Can Learn From The Boy Scout Slogan

As I mentioned in my previous post, I love the Boy Scouts.  I spent many years as both a boy participant and an adult leader. Scouting teaches boys important skills and manners that will serve them well as adults and as business leaders.  

The Boy Scout Slogan offers another great opportunity learning opportunity for entrepreneurs and business leaders.  Do a Good Turn Daily.  It seems simple enough.  According to the Scouting literature, that can mean something as simple as a small, thoughtful act like helping a child across a busy street, going to the store for an elderly neighbor or welcoming a new student to your school; or a really big turn like saving a life, helping out after a disaster or working on a conservation project.  It goes on to say that a good turn is more than simple good manners; it is a special act of kindness.

The slogan calls for boys to do a good turn every day.  Now if a boy were to have not only good manners, but also behave with special acts of kindness ever day, that would make for a pretty special boy.  Little old ladies and young children standing on street corners would be clammering for such boys and their demand would be high.  Everyone would want such a boy in their neighborhood.  One and all would lavish praise on such a boy.  He would be a hero among boys.

What if we replace ‘boy’ with ‘company’?  What would happen in the neighborhood, let’s call it a market, if the boy, let’s call him a company, were to act with not only good manners, but also with special acts of kindness, let’s call it superior customer focus, every day?  How would such a company be regarded in the market and by its customers?  It would be an anomoly in the industry.  In fact, such companies do exist, but they are so rare as to have special case studies written about them in business schools because of their unusual behavior.  Books would be written about such companies defining how they do what they do.  Articles would tout the awesomeness of their employees, systems and management.  

So why don’t we, as entrepreneurs, embrace this idea of ‘Do a Good Turn Daily?’  Do we get so hung up in the day-to-day activities of running our little businesses that we forget who our customers are and that this whole process is really about them, not us?  Do we just get tired or worse yet, just don’t care anymore?  Obviously, the answer is different for each of our organizations.  Maybe we should go back to our Mission Statements and Value Statements and see what it is that we’re supposed to be all about.

I think the Boy Scout Slogan reminds us that it’s not about fancy systems and better technology and improved products necessarily.  It’s about serving our customers in a way that makes them happy to do business with us.  It’s about providing value.  It’s about making your customer’s life better.  It’s about special acts of kindness, every day.  That’s not really so hard, is it?

What Entrepreneurs Can Learn From The Boy Scout Motto

I have been involved with the Boy Scouts for many years.  While I’m not currently doing any scouting, I was a Cub Scout, Webelo and Boy Scout as a kid.  As an adult, I was an adult volunteer, Assistant Scoutmaster of a Troop in Ohio and started a Cub Scout pack in Georgia.  One of my biggest regrets in life was not working harder as a Boy Scout to get my Eagle Scout rank.  It didn’t mean anything to me as an early teen and baseball and band took over my life as more important activities and I eventually quit attending Scout meetings.  I wish I’d done more.

The Boy Scouts is a fine organization.  They teach boys how to be better students, better stewards of the land, better citizens and better men.  It’s hard to find many critics of the program’s outreach and positive influence on boys.  But I think there’s another great benefit to be gained from Scouting.  It makes better entrepreneurs.

In this series of blog posts, I’ll discuss what entrepreneurs could learn from the Boy Scouts by studying the Boy Scout Motto, the Boy Scout Slogan, the Boy Scout Oath, and the Boy Scout Law.  Those of you who grew up in Scouting are smiling already and can probably jump ahead to the punch line, so let’s begin with the Boy Scout Motto.

The Boy Scout Motto:  Be Prepared!

Need I go on?  Someone asked Robert Baden-Powell, founder of the Boy Scouts in about 1908, “Be prepared for what?”  To which Baden-Powell responded “Why, for any old thing.”  

Baden-Powell wasn’t just thinking about emergencies either.  He thought Scouts should prepare themselves to become good and productive citizens and to be ready in mind and body for any of life’s struggles that might lie ahead.  He wanted Scouts to be prepared for life!  He wanted the boys to live happily and without regret, knowing that they had done their best.  That’s really what Scouting is about, at its core. 

Entrepreneurs could adopt the same approach for their ventures.  Be prepared for business! Anyone who’s worked in business knows that every day brings a new challenge, even for the best run organizations.  For small businesses, the challenge is even greater due to the small staff and many duties fow which each member of the team is responsible.  So how do you ‘Be Prepared’ in your business?

Take time to plan.  Iit’s difficult to run a business when you’re never ahead of the curve.  Only by setting aside a little time for you and your staff to plan for upcoming events and activities, to work on your business instead of in it, will ever be prepared.  What is the vision and goals of the company?  Do you employees know against what to evaluate potential problems or opportunities so that the company can grow and properly support its customers? 

Create an operation's manual.  Working by yourself or with your staff if appropriate, study one piece of your business at a time and define the best practices for that area.  Document the policies governing the activity and procedures by which you’ll get the work done.  Take time to train your existing and new employees in the company policies and procedures.  Think of your business as a franchise.  If you were going to sell franchises in your buisness, how would you set it up?  If you wanted your business to run perfectly without you being there, how would you arrange things? 

Measure your performance.  If you don’t know where you are now, how can you know when you get there?  And where is there?  Create a full-blown system of metrics for your business, or just a corporate dashboard.  Start somewhere.  Measure your performance on a regular basis and share the information with your employees.  Get them involved in the measurement and goal setting process.  It does almost no good for you to set goals and measure your progress in secret.  If you employees know what the goals are and especially if you get them involved in the measurement process and goal setting, they’ll get excited about growing the company into the organization of which you dream.  Employees want to work on something grand.  Create a system that allows them to be part of the process and take pride in their work and they’ll surprise you with their efforts.

NEXT:  What Entrepreneurs Can Learn From The Boy Scout Slogan

8 Big Mistakes Small Businesses Make

Do you realize that there are mistakes you can make at various stages of your business’ growth that can be slowly killing it for months or even years if you don’t watch for them?  These mistakes do exist and they are not just reserved for the rookie companies. Many working businesses, including those you might think are “successful” because they’ve been around for 10+ years, are often still making them… and are possibly losing a lot of money and/or wasting a lot of time in the process. 

Although some of these mistakes seem aimed more at service type companies, they really do fit the bill for almost any type of industry.  I’ve done my best with the listings below to give examples to prove it.

1. Underestimating Project/Service Time - This is a big one and it pertains to service companies as well as companies that sell a product. This is a service company’s bread and butter.  If you don’t estimate your time to perform each and every service in your repertoire, you will get burned and there is little you can do about it but bite the bullet and learn from it.  The best way to estimate time is to do it once yourself or watch your best employee do the task and then throw in a little fudge factor on top of it.  For product companies, time becomes an issue with logistics so be aware!
   
2. Not Knowing YOUR Company Numbers - Notice I emphasized the word “your”. It’s a common mistake to use a competitor’s numbers as your pricing gauge without actually knowing why they use those numbers.  Think about the nightmare you will get yourself into if you take a competitor’s price, cut it by 10% and then start selling. What if the competition has a bad pricing structure and is barely making money or even losing money?  What if your costs are more than theirs?  You can use competitor prices as a starting point but you can’t base your whole strategy on it.
   
   Different industries have their own cost variables and you need to be aware of them for your project or product pricing.  What you pay for a product you are going to sell is not the only cost to have in your head when you are pricing products.  How much your labor and materials cost for a service is only a piece of an hourly rate.  Employees cost more than just salary and not every employee is part of your labor cost.  Every company has insurance in addition to overhead expenditures that need to be part of your price.  Oh, by the way, the big one that many people forget about in their price is the quality factor. What you include as “standard services” or “standard product features” as well as job site etiquette or in store service or warranties all need to go into your pricing.
3. Not Charging for All of Your Time & Costs - This seems like a ridiculuous statement to some but I bet most business owners will admit that they have given away a little too much of the farm at times.  Hey, there is nothing wrong with giving a little extra here and there to show you care. But either way, that’s not what I’m talking about here. What concerns me are those that put a lot of quality into their work or products or stores and do not cover the cost for it.  As an example, say you run a service company and your competitors don’t do a certain standard service that you do.  You can’t just undercut their price to steal a job; you need to have that cost covered in your rate and advertise the fact that it comes with the price upfront.  Stores undermine themselves, for example, when they put more people on the floor for customer service but don’t charge for it. These things cost you money and when your competitors don’t do them it costs them less money.  Put out better service and then under price them, and your competition just has to wait a little bit for you to fall on your face so they can swoop back in.
   
   As a business owner, you need to believe that you are providing your clients worthwhile wares that deserve to be paid for.  If you get the chance to explain why your prices are higher, then take that opportunity and do it.  If they don’t like the fact that you include things that others charge extra for later or that you treat them better, then they are most likely completely price shoppers.  You don’t want them as regular customers anyway.
4. Not Getting Paid Fast Enough - That’s right, the old cash flow issue.  As long as you are actually making enough money to pay the bills, this problem can be solved, prevented or at least made to be not as bad as it could be.  Here’s the deal:  First off all, bill customers very promptly.  It is very common for a small business to not have the procedures or systems in place to get invoices generated and out the door in a timely fashion.  Again, this would seem unlikely since that’s the reason why we are doing the work- to get paid. But it is very easy for the people responsible for getting this info to the billing people to be too busy to get it there or not have enough organization to give it to them the right way.
   
   The second part to slowing down or stopping a regular cash flow crunch is to make the quickest payment deals possible with customers and the slowest possible with vendors and employees.  If there is any way not to pay employees any more than twice a month, you better do it.  Contractors always have an issue with this. If you must pay weekly, then tell them before they are hired that they will be getting the first week held back, essentially buying you a week.
   
   Part three involves credit.  If your company can get a credit card, then get it. This allows for certain important things to be bought (that you can afford) that might come up during a cash flow crunch.  Better yet, especially if you have no choice but to deal with 45+ day customer payments, do your best to get a company line of credit.  This is a must if you plan on selling to the government or doing commercial service work.  These clients often have 60 to 90 day wait periods. 
5. Failure to Have Solid Systems and Procedures in Place - Too many procedures (known as “red tape”) is the reason why many people start their own business in the first place.  Unfortunately, having no procedures and systems in place at all is not an alternative.  Depending on the type of industry, business owners must come to a happy medium or chaos and the unknown will ensue. Some basic examples where procedures or systems are needed include billing, collections, payroll, human resources (interviewing, hiring, vacations, benefits, job responsibilities, etc.), manufacturing, operating equipment, maintaining equipment, inventory, sales calls/visits and logistics to name a few.
   
   Even a one person show needs to have some admin procedures in place.  This will make it easier to hire temps and subcontractors and control what they are doing for you.  Without at least a watered down version of a system or procedure to do everyday work, you will be to blame for causing many major headaches as your company grows.  I can’t emphasize how important this is for when you bring on new employees.  I’m sure you heard this before, but I am also a big proponent of having an employee handbook even for one employee.  It’s amazing the trouble people can cause business owners just because they allow you to pay them.
6. Spending Advertising Money Just to Say You Advertise - I would almost rather see my clients not advertise then to spend without regard to tracking the results.  There is no point in a marketing campaign if you do not put things in place that allow you to measure how well the plan is working.  The other wasteful part of marketing is not tracking their previously successful campaigns.  Why some people think that just because a $400 dollar a month ad worked once very well for one busy season, that it will automatically work every year after that is beyond me.
7. Spreading Yourself Too Thin - This is a classic mistake made by every entrepreneur. The key is to figure out when you are at that “wearing too many hats” point and start getting some help.  The solution here is to know your strengths and to be able see when you are not performing the duties that demand these skills.  If you are the best sales person on the company, you can’t get caught up in day-to-day operations.  If you do, sales will slip and eventually you won’t have any operations to worry about.  Think about this to help you figure out if you are spread too thin: Did you really go into business for yourself to work 80+ hours a week?
8. Not Getting Help Soon Enough - Set goals to know when to hire people to take over where you are light on knowledge. Not getting help or waiting too long can kill a company.  Most people who start a business do it because they are good at the technical end or the sales end.  If you know the best way to make a widget, then your strength is in production and that is where your time should be spent.  Hire an outside company or consultant to take care of the sales and marketing and then hire inside when you can afford someone full time.  Don’t be something to your company that you are not. It will only hold you back.
   
   The three big issues people like to tackle themselves but usually are least knowledgeable about are legal issues, accounting/bookkeeping issues and daily operations issues.  The odds are that these three things are your weakest link so if you don’t have a partner that has the background for these subjects, then be prepared to get help as soon as possible.  It’s preferable that you do this before you start a business.

Although looking for these problems at any time is a good idea, the end of a year or season is an excellent business interval to make sure you are not making these errors.  Take the time, or make the time, to fix these problems. If you don’t know how to reverse the problems, then get some help.  If you really don’t have enough time to either figure out if you have these issues or know they are there and can’t break away long enough to do it right, then get some help.

Competitive Intelligence For Startups

One of the key questions in the business planning process is determining what’s happening in your market.   Trying to determine who your real competition is and what their strengths and weaknesses are can be a real challenge.  Where you stack-up against your competition will be a key to your success in the market.  Competitive intelligence is the process of defining, gathering and distributing information about the products, services, customers, strategies and capabilities of your customers and the market environment in which you operate.  Once collected, this information must be compiled and presented to management to make strategic dedicions for your organization.  Just collecting the information isn’t enough.  If you file the data away in a folder on the server or in a file drawer never to see the light of day, you’ve wasted your time and efforts.  The information is only valuable when used as a tool to better manage your own organizations strategic efforts.

Competitive intelligence is about comparing your company to that of your competitors.  You are trying to collect actionable data that identifies risks and opportunities before they become common knowledge.  Positioning your company to act first or react quicker to changing market conditions may be the edge you need to succeed.  Keep in mind that some of the information you gather may not be true.   Just because you find something in print on the internet, does not mean it’s factual.  Evaluate the source of the data and don’t let your group chase a single piece of bad data down a path or no return.

Competititve intelligence has been used by the largest companys for many years.  It’s thought to be an expensive proposition not available for small business and startups.  In fact, I teach C.I. to every would-be entrepreneur and startup class, we just call it by another name; market research.  So exactly what should a startup or small business look for in the way of market research or C.I.?

Define Yourself – Before you can realistically hope to gleen information about your competitors and their strategic operations, you need to understand your own goals and objectives in the market.  Have a well defined business model with goals and financial projections.  If you don’t have a baseline on yourself, how will you know what kind of information to collect and what will you measure against?

  

Define the Who – Which competitors are really directly involved in your market?  Which indirect ones pose a real threat to your plan?  Pick a small group of competitors to watch.  You can only watch a limited number of competitors, so pick carefully.  And don’t spend all your efforts on the largest competitors and miss the new startups that may take your industry by storm.

  

Define the What – Determine on what to focus your intelligence gathering efforts; goals, management team members, growth objectives and direction, available resources, technological advances.  You can’t watch everything.  Most companies focus on strategic and capability oriented activities.  Most information is just noise.  Focus your attention on the few things that really matter in your industry.  The data you collect must be useful to your management team in making strategic decisions for your company.  If the information is not actionable, it’s not going to be very useful.

  

Define the How – The growing on-line world makes much of the data gathering effort easier than ever before.  Using news services to search for articles and news releases that contain certain keywords can automate the process.  Fee providers like Dunn and Bradstreet, or First Call collect data on physical location, management, history and financial performance.  Other data sources can typically be accessed from your larger public libraries or university libraries which carry subscriptions to fee based databases and services.  Discussion groups and message boards will entertain discussions about every topic you can think of relative to a company’s products, service and customer service habits.  While you have to take some of this data with a grain of salt, the boards will serve as an indication of how they operate and respond to customer compalints.

And then there’s the old-fashioned method of actually talking to people.  Networking and industry trade associations and trade shows can be an excellent source of the most current information.  Companies tend to send their best people to trade association meetings and shows to speak.  In addition, the job boards will reveal the kinds of talent a company needs or holes in their organization that must be filled in order to head out in a new direction.  Good talent is hard to find so companies must be aggressive in touting their vacancies and needs.  Some reading between the lines will be very useful for analyzing a growing company. 

   

Define the Process – Who will collect the data?  Where will you store the information?  Which employees and departments can access and add to the database?  Most importantly, how will you use the information to better manage your own business?  The data should be used to further your understanding of the competitive landscape and to drive strategic action.  Collecting data just to fill a database is a waste of time.  Have a plan for management to regularly review the information.  Change what you collect and how you collect it over time to fine tune the kind of information that your management needs to make strategic decisions. 

Business moves a breakneck speed and a nimble company can change direction on a dime.  How will you respond and more importantly, how long will it take you to figure out what they’ve done?  While this type of information is especially important in the business planning stage as you try to determine the feasibility of a business model, don’t forget to keep at it once you’re in business.  The business world doesn’t stop once your business gets it initial funding.

The Pareto Principle and Business Profitability

How to Use the 80-20 Rule to Improve Your Business

This is a follow-up to the April 14th post about using Pareto Charts to improve profitability in your business.

Vilfredo Pareto (1848-1923), an Italian economist, philosopher and industrialist, created a mathematical formula to describe the unequal distribution of wealth.  In a paper written in 1906, he observed that approximately 20% of the Italian population owned 80% of the wealth in their country.  Pareto’s Principle, sometimes known as the 80/20 Rule, was made famous by U.S. quality poineer Dr. Joseph Juran in the 1930s and 40s.  Dr. Juran recognized a universal principle he called the “vital few and trivial many.”  Mostly as a result of Dr. Juran’s work showing that 20% of something is usually responsible for 80% of the results, Pareto’s Principle or the 80/20 Rule became widely know and adopted by scientists in many different disciplines.

What Is It?

The 80/20 Rule suggests that in most anyting, the few (20%) are vital and the many (80%) are trivial.  In Pareto’s theory, he suggested that only 20% of the population held 80% of the wealth.  In your business, it might mean that 80% of your warehouse space is taken up by 20% of your inventory.  Customer service professionals understand that 20% of the customers are responsible for 80% of the order volume and additionally, 80% of the complaints come from only 20% of the customers, though probably not the same 20%.

Why Is It Important?

Unless you’re asleep, you probably already understand why this is important to your business.  If not, keep reading.

The Pareto Principle teaches us that most of our business problems (80%) come from a small source (20%) and just as importantly, that a small group of customers (roughly 20%) generate most of our revenue (80%).  As a business owner, the principle suggests that the bulk of your daily activity, in terms of time, is trivial and that only a small amount of your daily calendar actually contributes to your wallet.

How Do I Use It?

Let’s use a couple of specific examples to illustrate how to use the Pareto Principle to improve your business profitability.

Example 1 – Applying the 80/20 Rule to your sales revenue suggests that 80% of your net sales are generated by only 20% of your customer base.  Do the math yourself and confirm the rough estimates.  It may be that 23% of the customers represent 84% of your revenue or another variation, the exact percentages are not important.  What’s important to recognize is that a vital few customers are responsible for the bulk of your sales.  There are at least two very important take-aways from this analysis in your own business: 1) you’d better make sure you are taking care of the top 20% of your customers and keeping them satisfied, and 2) if you want to grow you business, look to the other 80% of customers.  They represent the best chance to generate more repeat sales or to cross-sell other products or services.  It’s likely that these 80% of customers are not buying up to their potential.

Example 2 – Applying the 80/20 Rule to your customer service function suggests that 80% of the complaints come from 20% of the customers.  It also suggests that 80% of your problems in properly taking, filling and delivering customer orders correctly, come from 20% of the activity.  Like using the Pareto Chart, this example requires collecting data (You really should already be doing this!) about the complaints in your order fullfilment function.  If you use a bar chart to display the complaints by type (this sounds familiar) and then rank them by frequency of occurrence (yes, I’m sure I’ve read this somewhere before), the top 20% of complaint types should account for 80% of the number of compaints.   Start with the top complaint type, get to the root cause of the issue and correct the problem.  Put the correction in place and track the results.  Wash, rinse and repeat.

Summary

You can apply the Pareto Principle to most any aspect of your business.  By using the 80/20 Rule to observe the track the problems hurting your customer relationships and opportunities to improve profitability and reduce costs, making improvements to your processes and tracking the results, you’ll be more efficient and profitable in no time.

Using Pareto Charts to Improve Profitability

Vilfredo Pareto (1848-1923) was an Italian economist, philosopher, and industrialist who contributed much to the field of economics and quality.  Many of his economic philosophies led to the field of economics to move from one of social philosophy into a data intensive field of scientific research and mathematical equations.  However, as much as Pareto did for the study of economics and quality control, we can apply some of his theories and principles to help us run better businesses and help entrepreneurs make their businesses more profitable.

What Is It?

The Pareto Chart is one of the ‘Seven Basic Tools of Quality Control.’  It helps highlight the most important factors from among a group of many factors. In quality control, it is often used to represent the most common sources of defects or the highest occurrence of defects.  It is a simple bar chart that displays the number of occurrences on the left vertical axis and the category of occurrences on the horizontal axis.  While not required, you can add a right vertical axis which represents the cumulative percentage of the left axis to the total.  It’s self-explanatory when you see an example.

While this is a silly example, it shows the most common occurrence of reasons for students not having their homework in school. You can use this same chart tool to evaluate most any business process on which you can collect data.

Why Is This Important?

As an entrepreneur, this is a valuable tool for managing your business.  Even though you don’t care why students didn’t hand in their homework, you probably do care why you get complaints from your customer service or your delivery function, or why your accounting department can’t get the books closed on time or maybe what are you biggest overhead expenses.  There are as many applications as there are brilliant entrepreneurial minds to think of them.  Obviously, if you manufacture widgets or something else, you’ll want to use this quality tool on your manufacturing process.  However, you can also use it to help you improve any process in your business.

How To Use It

Identify any process within your company.  Collect data on the makeup of the issue.  Chart the data by number of occurrences, ranking the data in highest to lowest number order.  You don’t need to chart every issue, just those with the highest frequency.  Start working on the issue which is ranked first.  Make changes to your process and then collect more data.  Repeat the process until the first item is no longer the most frequent problem.  Once that happens, start working on the new number one problem.  You should be able to make improvements to those issues which cause you the most worries.  If you aren’t seeing any improvement, you probably aren’t getting to the root cause of the problem.  You may have identified and made changes to symptoms of the problem, without actually fixing the problem itself.  If you find that you aren’t making any progress, look at your causes again and try to get to the root cause of the problem.

Give Us Some Real Examples!

Here’s a list of a few problems I’ve run into on previous jobs, maybe you can think of other areas where this type of analysis would be helpful.

• Customer Service Errors
• Shipping Errors
• Overhead Expenses Have Grown
• Delays in Closing Accounting Period
• Meetings Run Long
• Low Volume of Website Orders

Summary

You can apply the Pareto chart to most any problem or process in your business to identify those issues that cause the most problems, cost the most money, or cause you customers to buy elsewhere.  It’s limited only by your imagination and ability to collect meaningful data.

 

P.S.  I'm a big fan of Pareto and will be looking at some of his other theories and tool and how they can be used to improve your business over the next few weeks.

Heilmeier's Catechism

George Heilmeier, born in 1936, was an electrical engineer with Ph.D.s in solid state materials and electronics.  He spent most of the 1970s working at the Department of Defense at the Defense Advanced Research Projects Agency (DARPA) and went on to work at and head several other companies such as Texas Instruments and Bellcore.  Heilmeier was awarded numerous prizes and awards from prestigeous science and engineering organizations and holds 15 patents.  He’s credited with being one of the pioneers to develop liquid crystal displays.

While George Heilmeier was indeed one of the brightest stars in the world of science and engineering in the second half of the 20th Century, he’s most well known for a set of criteria he developed for analyzing research projects and product development efforts.  Those criteria, know as Heilmeier’s Catechism, were aimed at project managers.  Heilmeier reckoned that any project manager should be able to answer these questions relating to project success before funding of the project or product would move forward.  The interesting thing about these criteria is that they can be applied to almost any kind of project, including starting a business.

Let’s look at the questions, and see how they might apply to starting or running a business:

• What are you trying to do? (Articulate your objectives using absolutely no jargon.)
  Sounds like the beginnings of a business plan to me.  What are the goals and objectives of the company described in plain language.
• How is it done today, and what are the limits of current practice?
  A SWOT analysis of your competition and industry will fulfull this question.
• What's new in your approach and why do you think it will be successful?
  Branding and a Marketing Plan are just the ticket to answer this question.
• Who cares?
  Who are your customers and what do they want.
• If you're successful, what difference will it make?
  What does it take to be successful and if you are, will you actually make any money.  It sounds like financial analysis to me.
• What are the risks and the payoffs?
  What are the assumptions that you used to build your financial statements and how conservative are your projections?
• How much will it cost?
  Have you done your cost analysis?
• How long will it take?
  A break-even analysis will answer this question.
• What are the midterm and final "exams" to check for success.
  What a novel approach.  Let’s build in some early and mid-term success measures to make sure we’re on course to meet our plan objectives.

What we find is that Heilmeier’s Catechism is nothing more than standard business planning.  Perhaps it’s a ‘chicken or the egg’ issue; but really, who cares?  Heilmeier has applied common sense and standard business practices to the area of scientific inquiry.  And we can use his model to double check our plans to insure our business plans and projects are on track for success.

Weathering the Economic Storm - Part 3 - Review Costs

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Here in part three, I'll discuss reviewing your costs.  Yes, I know it's another 'Duh', but....

Review Costs

The small business owner should review cost structures and operating efficiencies and make improvement plans.  Start with your product costs.  Look for ways to reduce costs in every phase of operations.  If you can save a few pennies of cost in each operation, you’ll make your whole business more profitable.  Some of the more obvious ways to reduce your product costs are:

Inventory Management:

• Better manage your inventories
• Improve your purchasing efficiencies
• Review your min-max order points to reduce costs
• Work with vendors to improve delivery lead times
• Consider bulk purchase contracts to reduce costs
• Use vendors to warehouse raw material inventories
• Use just in time deliveries where possible
• Evaluate employee counts and efficiencies

Review Operating Costs of:

• Employee workloads and counts
• Benefits coverage and costs with your insurance agent and make changes as appropriate
• Your energy usage; on plant equipment, warehouses, offices - everywhere you use it
• Operating costs of in-plant vehicles
• Fleet efficiencies; track # of deliveries, % of truck full, speed, idling

Review Costs of Services:

• Telephone
• Internet 
• Waste disposal
• Electricity, natural gas, water
• Confidential shredding
• Temp employee contracts
• Office equipment service contracts

Financial Costs:

• Insurance coverages
• Bank line interest rates
• Credit card fees
• Merchant account fees

The lists can go on and on, but I think you get the picture.  With your management team, divide and conquer.  Split the company operating costs in to categories and assign each to the manager most able to attack costs in that part of the company.  Take each category and apply a simple Pareto analysis to the costs and start with the biggest.  Don't be afraid to think outside the box either.  If the only way to decrease fleet costs is to design and implement a fleet safety policy, then do it.  Generally speaking, the safer and more well trained your fleet, the less accidents they'll have.  Fewer accidents mean lower insurance cost, lower deductible costs and lower damage to leased delivery vehicles.  You win all around, plus your employees behave more safely, and that's always a good thing.

Once you've reduced costs as far as possible on the first item, start working on the second item.  On the other hand, if you find that you can save money on an item further down the list by making a simple change, do it.  Take whatever approach works for you and your company.  As those shoe guys say, "Just Do It!"

NEXT:  It's the Cash!

Weathering the Economic Storm - Part 2 - Review Profitability

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I'll talk about profitability.  I know, many of you are saying "duh!"  But my experience in nearly three decades of business, large and small, is that things that go without saying, should be said.

Review Profitability

While a dashboard is the first place to start, it’s only the beginning.  In difficult economic times, you need to re-evaluate your whole business model and squeeze out every penny of cost and every measure of efficiency in your systems.  Begin by looking at the big picture, but on a smaller basis.  Create weekly income statements and cash flow reports to discover faster if you have problems.  If something doesn’t look right, dig deeper into the numbers to see what’s happening and hopefully be in a position to take action quickly.  Don't wait for a whole month to go by and then wait a couple of weeks more to prepare official statements before you look at something.  Use the basic output from your accounting system and call it 'close enough' and take a look every week at your performance.  You'll know which accrual items are missing and which month-end entries are not included.  Don't get hung up on those details.  Look at the basic performance of the business units and hunt for abnormalities.  If you find them, go to the source department and try to determine the root cause of the issue.

Also look at the profitability of your major product lines and customers.  Do you have products that aren’t carrying their weight?  Evaluate the possibility of raising prices, changing the cost structure or physical makeup or whether to quit making the product or service all together.  It does you no good to produce products at a loss unless a very small real dollar loss is creating big profits or dramatically reducing costs in another product line.

If you have customers that aren’t profitable, evaluate them in the same way you would a loss-producing product.  Do you really need a customer that causes you to loose money?  Unless they provide some other benefit far in excess of the losses they produce, you need to discuss price increases to make them somewhat profitable or help them find another supplier so you can stop your bleeding.  While getting rid o a customer flies in the face of conventional wisdom, you don't need to keep a customer who's putting you in the red.  In some cases, customers who know their accounts are not profitable will be willing to work with you to find solutions so they don’t have to find another supplier.  However, if they don’t care about your mutual profitability, it’s time to send them packing.

NEXT:  Reviewing Costs

Weathering the Economic Storm - Part 1 - Corporate Dashboard

The economy is slow and jobs are disappearing by the day.  The outlook for most businesses is not so rose-colored these days.   How’s a small business owner to survive this economic storm?

Over the next five entries, we'll look at strategies that small business owners can employ to re-evaluate their business model and operating efficiencies.  This is no time for halfhearted management.  Times of economic distress call for decisive action and clear plans.  You need your whole team working to forward your plan in the most efficient and productive manner possible.

Corporate Dashboard

Start by re-evaluating your corporate dashboard.  What’s a corporate dashboard, you say?  It’s like your car’s dashboard in that you have a few gauges that tell you the important aspects of your cars performance.  For instance you have a speedometer, tachometer, fuel gauge, temperature gauge and voltmeter.  Perhaps your car has more, perhaps less.  In any event, these few gauges measure and tell you in a visual way, how the most important functions of your car are performing.  In the same way, you and your management should evaluate and determine the most important functions of your business and then keep your eyes on them every day.  By creating a ‘dashboard’, you have a single sheet of paper or even better, a single computer screen displaying the vital characteristics of your business.  If one of the gauges is off, you should investigate.

On a regular basis, you and your team should determine if your dashboard is still serving as the most important measures of your business.  If not, make the necessary changes.  Once you've determined what to look at, then actually look at it.  Having a nice dashboard set up in your corporate intranet and then not using it to better manage your business is like buying a new car and not filling it with fuel.  It might look nice sitting there, but it doesn't provide you any transportation and it costs a lot of money.

When your dashboard tells you that something is amiss in your operations, investigate further and get to the bottom of the problem.  Determine the best course of action to fix the problem and then measure your results.  Continue tweaking the problem and measuring your results until the problem is solved or the process is improved.  The key is to take action and measure results. 

NEXT:  Reviewing Profitability

Welcome

Welcome to our blog.  

Effective today, Plainsman Enterprises, LLC is now Blue Point Strategies, LLC.  Our name change reflects our new location in Huntsville, Alabama and our commitment to small business consulting and coaching.  Huntsville as named the #1 city to start a new business by Fortune magazine.  We agree!

Huntsville has a strong and supportive business climate.  From the Cities of Huntsville and Madison to the Chamber of Commerce and other support organizations like the Women's Business Center of North Alabama and the UAHuntsville and Alabama A&M Small Business Development Centers, Huntsville is poised to support small business.  And Blue Point Strategies is here to help you get the details right.  Contact us today to see how we can help you succeed and not become a small business statistic.