Growth & Customers
How to choose the right performance metrics for your business
How tracking revenue goals alone can set your business up for failure
Every business is unique in the ways that it evaluates financial performance. In fact, a business’ core company metrics can change from year to year based on strategy. For example, businesses that compete on cost may focus more on efficiency and profit margins, while those that compete on customer experience may be more concerned with levels of customer satisfaction. However, there are some usual suspects we typically see on most businesses’ company performance scorecards: revenue or percentage of revenue goal achieved; free cash flow; profitability, or some calculation of revenues minus expense.
There is absolutely nothing wrong with evaluating these metrics, as long as you’re not using them alone in the way you evaluate or even predict, the success of your business.
Example: weight loss
It’s a common and simple thing for people to declare their weight loss goals, however, it is just as common for those goals to not be achieved. Why is weight loss such a difficult thing? It’s easy to say ‘I’m going to lose 15 lbs. in three months. So, I need to lose five lbs. each month for the next three months.’ What’s the error in this statement? It is incomplete.
If I monitor my weight alone, then I am using a backward-looking indicator of my weight loss goals. My weight is the result of the activities I have or have not done each day – the result of my lifestyle. It is not a measure that changes my lifestyle. So, while I may mentally try to keep up with things like the number of calories I consume and the amount of exercise I do, I am only monitoring my weight. If I weigh myself at the end of every month, I’m probably going to be surprised – and disappointed – by what the scale tells me. At the end of three months, I may not be at my target weight, or I may achieve it, but then in three months be right back where I am today.
To really lose 15 lbs. in three months, I need to monitor more than just my weight:
- Balance my caloric intake. I need to burn 3500 calories to lose one pound of fat. To lose one pound a week, I need to diet or exercise my way to a 500-calorie deficit per day.
- Increase my target heart rate during my workout. I can’t just do a low-intensity exercise for 30 minutes and expect to burn the calories I need to achieve my 500-calorie per day deficit. I need to ensure my workout is intense enough to burn the calories I need to burn.
- Maintain my body composition. What I don’t want to do in my process of losing weight is decrease muscle mass. I need to monitor my Body Mass Index (BMI).
In summary, the important thing for me to do to get from the weight I am now, to 15 pounds lighter is to monitor my performance against these indicative, proactive metrics. I’ve set targets for what my performance against those metrics should be, and can therefore on a daily basis monitor my performance against my overall weight loss goal. I’ve put metrics in place to allow me to be proactive about monitoring my overall weight loss goal and I can adjust when I’ve fallen off track.
So, in three months, there should be no surprises about whether or not I’ve lost 15 pounds.
The danger in monitoring traditional metrics alone
In the same way, many businesses use traditional metrics like performance against revenue targets to determine if their business is successful. Every day, they get on the “scale” and see how their business is performing against its revenue goals. However, there are other metrics they should be monitoring so they know how they’ll perform against their revenue targets and can put action plans in place to course correct if it seems that revenue goals may be mixed. I share more about what those metrics are in my blog: The three types of financial indicators your business should be monitoring.
What if business leaders were to peel back the onion a bit and evaluate the areas of the business that lead to revenue gains, or cost control, or free cash flow? If they could establish metrics to tell them how those layers of the onion are performing, then they could almost predict performance metrics like cash flow and revenue gains. They’ll find that traditional company performance metrics:
- Don’t allow them to be proactive and make necessary remediation to business performance so that financial results aren’t impacted.
- Don’t allow them to be more precise in predicting cash flow and revenue so that there are no surprises later on.
- Make it difficult for your teams to understand how their individual functions or departments contribute to overall company performance, ultimately meaning these teams don’t feel accountable for the end results.
Indicative, proactive business metrics allow business leaders to evolve beyond traditional financial performance metrics, giving them insights into how the business will ultimately perform.
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