Evaluating Business Performance

Let me start with the following disclaimer – I am not an accountant, financial consultant, Chartered Accountant, or CPA. I am business owner who can read the balance sheet, who understands the impact of short-term expenditures on long-term financial performance.

However, I understand how growth needs to be measured financially, especially if your goal is to eventually sell the company or take it big time with investment capital. Everything you do – land new accounts, develop a new product, purchase equipment, hire people, etc. is measured against its impact on:

• Market Value
• Cash Flow
• Revenue and Revenue Growth
• Return on Invested Capital
• Cost of Capital

Market Value:
The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. The market capitalization plus the market value of debt. Sometimes referred to as "total market value.”

Cash Flow:
A revenue or expense stream that changes a cash account over a given period. Cash in-flows usually arise from one of three activities - financing, operations or investing - though they also occur because of donations or gifts in the case of personal finance. Cash out-flows result from expenses or investments. This holds true for both business and personal finance.

Revenue and Revenue Growth:
The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.Revenue is also known as "REVs"

Return on Invested Capital (ROIC)
A calculation used to assess a company's potential to be a quality investment by determining how well (i.e. profitably) a company's management is able to allocate capital into its operations. Comparing a company's ROIC with its cost of capital (WACC) reveals whether invested capital was used effectively.

Cost of Capital
The required return necessary to make a capital budgeting project - such as building a new factory - worthwhile. Cost of capital would include the cost of debt and the cost of equity.

Operationalize Growth Metrics by Managing Your Financials

1. Create attractive gross margins early – target 60% or greater and maintain it through various growth stages – never sacrifice gross margin to buy market share
2. Contain expenses to achieve 20+ EBITDA – total investment equals/never exceeds the difference between gross margin and 20+% of EBITDA (Earnings before Interest, Taxes, and Depreciation)
3. Become cash flow positive early – deliver consistent cash in proportion to revenue growth
4. Utilize incremental gross margins to self-fund incremental investments – provides a unique opportunity to self-fund a higher level of investment in sales and marketing as well as product development

………Profit at All Costs

However, you cannot successfully manage these metrics after the fact. Using financials or trailing indicators to run the business is like driving the car by looking through the rear view mirror or driving your boat by watching its wake.

Only by installing a predictive measurement can you decide what actions are on your short list (the principle of ONE THING) and then measured in the real time so you can drive business measures in the right direction.

Leading in Real-Time

Running a business with real time information - the dream of most executives and managers has become a reality. Whether you call it Business Intelligence, Real-Time Enterprise, Real-Time Operations, etc., the solution is now available if you have the desire.

FORECAST
Applied Knowledge Labs is your powerful and cost effective choice. Our system enables your business to achieve the dream of competing with on-demand information. This capability improves in-the-moment decisions, and makes execution a core competence.

Imagine being just one click away from having today's information on customer service, information from current production teams on reduction in cycle time or how inspired are your front line people this week.

Corporate Dashboards
Collaborating with your executive team, we integrate current measures into dashboards and ensure line of sight to each individual. You can in one location combine the three elements of alignment:

• contribution to business objectives
• participation in improvement projects
• job requirements

Individual Scorecards
Far more challenging is designing a method of capturing data that does not distract from work or makes unreasonable demands. Our philosophy is to make the system match the requirements of common “day-timer” systems. We use this as our standard and depending on the frequency of updates driven by the job, our goal was a functioning system running on an investment of 15-20 minutes a day.

By taking a few minutes to update the system, each person will have a real time report on how well they are doing as self-managers. When this information is rolled up to the executive level, everything you need to run it in the real-time is available. Welcome to on-demand, real-time business information.

We can either build you a simple to operate low-tech paper system for posting visible performance targets, or help you find a software partner to automate that process.

The only question is in your mind is paper or electronic, not yes or no to building visible measures of day to day performance. You cannot manage what is not measured, whether that is management of self or management of the firm.

Predicting the Future

The challenge of any profession is to make the complex simple. Over our half-century of business improvements, we have directly experienced the complexity of running a sustainable business. Our job is to understand all of the underlying forces and nuances we experienced and make it simple. You cannot execute what is not understood or easily performed.

Predicting the future is not about crystal balls, reading entrails, or interpreting Nostradamus's quatrains. It is about understanding the most fundamental question in business: where is value today and where is it headed? Or what are my customers currently paying for and what will that be tomorrow?

Our organizational assessment FORECAST is the start of a process to capture an accurate and complete picture of your business. It allows a company to determine where and how value is being created and for whom, and what core competence is required to make this competitive advantage a reality.

Once we understand the competitive advantage opportunity of your market and position in that niche, we can help you identify the barriers and causes of gaps. FORECAST's analysis capabilities bring the internal barriers and causes, the upset conditions, to the scrutiny of all effected members of the organization.

Our research group designed FORECAST to be a flexible and customizable assessment to fit your unique issues. It is built on 26 micro-assessments such as Process Management and Customer Enthusiasm and can even evaluate your readiness for ISO as an example. Our ability to customize is limited only by the creativity of your questions.

The Four Critical Strategic Elements of Growth:

1. Competitive Advantage: (MARKET INTELLIGENCE) The essence of understanding market leadership, it identifies where the organization can excel and is the matched set for Core Competency. Competitive Advantage exist in both real time and the future, understanding the under or unserved needs with significant financial gain of a targeted niche.


2. Core Competence: (BRAND SUPERIORITY) It starts with brand, and what makes your brand superior in the eyes of the customer. Not just a marketing campaign, it is about perceived customer benefits of your end product and the experience of buying and using, it must be difficult for competitors to imitate, and finally creates uniqueness from anyone else.


3. Discretionary Performance: (TALENT) The amount of performance the organization can capture beyond what is required. Typically, standards are set artificially low. No business is able to sustain itself when people do the minimum. Every successful company has a competitive advantage through people who work harder then required or compensated.


4. Productive Capacity: (OPERATIONS) The essence of your business model, it measures the organization's ability to provide products, services, and customer enthusiasm to specified markets. It is the delivery component for Core Competency.

These form the core of our assessment technology; however, we are about more than gaining understanding. FORECAST's foundation is smaller, discrete assessments that provide the detail necessary to solve problems and create a plan to win.
Our assessment library includes:

1. Clarity of Vision, Mission, Values


2. Competitive Advantage


3. Vertical and Horizontal Alignment


4. Internal Operations and Support Processes


5. High Performance Employment Systems


6. Core Competence


7. Performance Management


8. Knowledge Management


9. Team Effectiveness & Focus


10. Learning & Growth


11. Change Readiness & Management


12. Customer & Market Dynamics


13. Organizational Structure


14. Environmental Dynamics


15. Horizontal Links to Client Development


16. Horizontal Links to Market & Innovation


17. Leadership Effectiveness


18. Sales Effectiveness


19. Employee Inspiration


20. Customer Enthusiasm


21. Customer Intelligence


22. Market Intelligence


23. Competitive Intelligence


24. Baldridge Award


25. Innovation Management


26. Process Management


27. Quality Management


28. Technology Management


29. Project Management


30. Management Efficiency


31. Training System


32. Productive Capacity


33. Canada’s Best Managed Companies

Measuring to Manage

After spending many years working with and competing against the big 5 consulting firms, we decided to build our own comprehensive organizational assessment. The difference would be a focus on sustainable growth and not an excuse to sell consulting services. Most of our competitors (McKinsey, et.al.) used assessments to sell their considerable assortment of products and services. This allowed the client to question the objectivity of the results because the process appeared to be nothing more than another step to sell more stuff.

We on the other hand only sell and service ONE THING – an assessment of the best practices for fast growth companies. That is it, nothing less or nothing more.

We call it FORECAST and the goal is in the name, to provide an accurate picture that identifies gaps between the future and present. It best serves managing growth, business planning, and improvement projects.

When we began the design process 2003, it was apparent a coherent model for measuring business performance as needed to explain the process. Using our background in process improvement and SPC (Statistical Process Control), we built the following model for business metrics: Predictive (Leading Indicators), Descriptive (Real-Time Indicators), and Evaluative (Trailing Indicators).

The ability to Predict: is starting the year or performing a mid-course correction with the knowledge of which actions will achieve the desired results - a short list of actions spells the difference between success and failure. The challenge is to have a model of how the company should function so being off-track is obvious to everyone.

The ability to Describe: is to track performance in real time. It makes running a real-time enterprise a reality. The challenge is how to build a scorekeeping system that is bottom up? How do you roll those measures up to create individual, group, and organizational dashboards? This bottom-up approach challenges every individual to “their best performance to date.”

Additionally it breaks the truth-fear paradox. Most business measures are not designed or used as corrective feedback (TRUING) instead it is employed for blame and faultfinding. The result is fear of the truth! How can any of us run a business when truth is avoided like the plague?

The ability to Evaluate: is the ability to review results against plan. It takes advantage of your current financial measures by expanding its ability to review decisions and actions taken during the year.

Most end of year evaluations simply measure results without a clear line of sight to cause and effect. Our critical addition is to back track through the various decisions and actions by using FORECAST to drive next year’s improvements.

A partnership with AKL enables your executives and managers to review and evaluate performance over the year. This ability cannot be overstated, you are now armed with your unique best practices to assess, design, align, and execute to achieve optimum growth.