The Systems Thinker Blog

Business Improvement: Turn Your Business into a Game and Keep Score!

Posted byRon Carroll

By now, you are convinced that business systems are the essential building blocks of the perfect business, one that runs itself efficiently and profitably. Getting the right people, those who are competent and motivated, adds spirit and power to your business processes. It is the combination of great people and great systems that produces great companies. When you add the elements of fun and competition—when you turn your business into a game and keep score—you will discover the grand secret to developing a truly remarkable company.

Make your business a game and keep score. 

People will actually pay for the opportunity to "work hard" when they enjoy what they are doing. Recreation and sports generate enthusiasm, energy and motivation not usually found in work-day activities. Many people feel their jobs are stressful, unrewarding, and even boring. Games are fun, engaging and fulfilling. People don't like to work. However, they do like to play and compete. So, start having some fun!

Make It a Game

Let's compare the game of football to your business. The coaches (managers) begin with a strategy for winning games. They recruit skilled players (employees) and assemble the best possible team. The coaches watch game films to learn the strengths and vulnerabilities of the competition. They create an effective game plan and practice hard to execute the plan with exactness.

Players learn the rules of the game, the field of play, and the importance of staying within set boundaries. During games, they continually have their eye on the goal and know how much time they have to reach it. Every play provides feedback that enables players and coaches to make necessary adjustments. Adversity and opposition produce even greater courage, determination and achievements.

But what would happen if there was no scoreboard? The stands would be empty. There would be no screaming fans; no one would even care. Keeping score and following player and game statistics is what generates buzz and creates wealthy sports stars.

The goal of any sport is to put more points on the board than your competition before the clock runs out. And the players' gritty determination to push the envelope of human performance gives us the amazing highlights on the evening sports news.

Scorekeeping in a positive way can help people become winners. Your employees want that opportunity. Only you can provide it!

Keep Score

Games are all about numbers! The number of yards the ball moves on a play determines if the play worked as planned, or not. The final numbers on the scoreboard reveal if a team had a successful game, and if the fans go home feeling triumphant and proud, or heads-down discouraged. Performance numbers are used to set player salaries and they determine if the managers get a new contract.

Managing by the numbers can transform teams with poor performance into fierce competitors. Analysis of individual and team scoring data leads to better results and winning seasons.

There are three types of business scorekeeping that you should pay attention to. The first includes a profit and loss statement, a balance sheet, and a statement of cash flows. These financial tools are rich with information on the health of your operation. They reveal strengths and weaknesses, performance trends, break-even points, and other intelligence for decision-making and problem-solving. They show the company's ability to generate profit and cash flow—the life blood of your business. These scorekeeping tools, referred to as lagging indicators, are primarily used by owners and managers.

The second type of scorekeeping involves measuring the results of your business systems, often referred to as leading indicators. System reports may include the number of sales leads generated by marketing campaigns, the percentage of defective products returned, the person-hours required to complete a job, the number of orders processed within a day, and so forth. Setting goals and measuring system results increases productivity and profitability. As in football, employees should receive frequent feedback regarding their individual and team performance.

The third type of scorekeeping requires a deep understanding of the key number that drive the economic engine of your company. Control of the key numbers determines the performance and growth of the business. If these one or two results are good, everything else tends to fall into place. An example in football might be the success rate of first down conversion attempts. If the team converts third-down plays to first downs at a high rate, they are moving the ball and have more opportunities to score.

Key numbers indicators (KPI) are usually expressed as ratios such as profit per "x" (profit/x). Search for the one denominator that has the most impact on the business. The obvious might be profit per product line, profit per store, profit per hour, or profit per job. However, a closer examination of what makes your company tick might reveal a better measurement such as profit per employee, profit per customer, profit per ton of finished product, profit per mile driven, and so forth.

Results to Resource Ratio

Charles Coonradt, author of The Game of Work, explains key numbers in terms of a "Results to Resource Ratio." In other words, what is being accomplished with the available resources? Managers, like coaches, are people who turn resources into results. The more efficiently they do this, the more successful they are as managers.

With the Results to Resource Ratio, results are expressed in quantifiable terms representing quantity, quality, timeliness, accuracy, profitability, and so forth. Resources include such things as time, space, equipment, inventory, or budget. In plain English, these ratios may appear as:

  • Sales dollars per square foot of floor space
  • Pounds of flour per ton of wheat processed
  • Defective units per thousand units produced
  • Average sales dollar per customer visit
  • Warranty service calls per client contract
  • Feet of wood moulded per machine hour

Focus attention on the most important results and the most expensive resources. These ratios can be used at every level of your business operations.

Manager-Coaches Drive Success

Managers are on the constant lookout for better ways to refine their business systems and add useful measures that will increase productivity. Progress is based upon the ability to improve measurement. In sports, statisticians look at new ways to measure player performance and compare output with other players.

Business and religious leader Thomas Monson teaches, "When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates."

Effective managers create specific, written goals. Team goals shape personal goals. Personal goals are the foundation of all achievements. Goals must answer the questions of how many (or how much), by when, and by whom. "How many" is the desired result. "By when" is the adrenaline-boosting deadline. "By whom" indicates ownership and accountability for the result.

Empower with Ownership

Ownership of a task drives personal motivation. This happens when the "right people" are allowed to choose their own rewards, set their own goals, and decide how they will accomplish those goals. Personal goals must fit within the prescribed system boundaries and be consistent with team goals. When a person chooses a goal, he or she simultaneously chooses to pay the price to attain it, and the payoff for its accomplishment.

Hire and empower self-motivated people who want to win. Tell them why the business system was created, how it works, and why it will benefit them. Enlist their knowledge, talents, energy and resources to improve the system and raise the bar on performance standards. As they achieve results, their self-esteem and sense of value to the company will grow. They will set new performance records. When they create greater value, compensate appropriately. Remember, "Winners keep track of results; losers keep track of reasons" (Charles Coonradt).

Give Frequent Feedback

Scorekeeping must be simple and objective, self-administered, and provide frequent feedback during the game. Employees should not have to depend on a supervisor to tell them how well they did. They know the score as the game progresses. The use of charts and graphs can give even more impact. Effective scorekeeping offers a comparison between current personal performance, past personal performance, and an accepted standard. If you want to improve the quality of performance of any activity, you simply increase the frequency of feedback.

Celebrate Victories

Without scorekeeping, we don't know when to celebrate. There is no end-zone dance. There is no glory! Create "games" in order to celebrate and savor the victories. Winning makes the game of work fun, brings the best out of players, and creates an extraordinarily profitable business.

In the Zone, imagine yourself as the coach of a team bound for the Super Bowl. Establish measuring systems that let you know every day how much closer you are getting to the goal. Focus your attention on the 20% of activity that produces 80% of the results. Find and work the key numbers that drive the economic engine of your business. Expect to win. Pay the price. And have fun!

One final thought: There is a very real price to pay! Read on and decide now if you are willing to pay it.

Step 10: Pay the Price  (Plus a Recommended Step 11)
Back to Table of Contents: 10 Easy Steps to Grow the Perfect Business

 

 

 

 

 

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Tags: Business Systems, Culture, Business Measurement

Business Measures: Make Your Business a Game and Keep Score!

Posted byRon Carroll

Combining great people with great business systems and processes will naturally produce a culture of excellence. When you add the elements of fun and friendly competition—when you turn your core business systems into a game and keep score—you will discover the grand secret for developing a truly remarkable company.

It is fascinating that people will actually pay for the privilege of working hard when they enjoy what they are doing. For example, sports and recreational activities produce levels of energy, enthusiasm, and drive not usually found during the typical business workday. Jobs are often boring, stressful, and unfulfilling. Games are fun, engaging and rewarding.

Many people don't like
the drudgery of routine work. However, they do like to play and compete. So, isn’t it time for your workers to start having some fun!

Making it a Game

Let's compare business to the game of football. The coaches (managers) must first have a vision of how to play and win games. They find talented players and assemble a skillful team. The coaches study the strengths and weaknesses of the competition. They design a strong game plan and work hard to execute their strategy with precision. (You can create a great game plan with the Organization Blueprint tool of Box Theory™ Software.)

Players (employees) must clearly understand the rules and the field of play (policies and procedures). They should know at all times where they are in relation to the goal and how much time they have to get there. Every play gives the coaches and players feedback on how best to move the ball up the field (leading indicators). Overcoming adversity and opposition produces gritty determination and ever-higher levels of achievement.

The Game of Work

But what do you think would happen if no one kept score? I'll tell you. The arena would be empty; the sport would die, and no one would care. Scoring and game statistics are what bring out the fans and create million-dollar sports heroes.

Keeping Score

The goal of most major sports is to put points on the board before the clock runs out. The effort and determination to do this is so intense that extraordinary performance and miraculous plays are regular features on the nightly sports news. Scoring is what creates winners, and everyone wants to be a winner, including your employees!

The number of yards generated by a play (system) determines if the play was successful or not. Final game scores reveal whether a team had a good game or not, and if the fans go home jubilant or dejected. Performance statistics predict future player salaries and determine if coaches are rehired.

It's all about the numbers!

When I was a young man, our family owned a manufacturing company that produced framed art and decorative accessories. We created scorecards for our production workers, and they received small bonuses each day by exceeding standard performance levels. We were blown away by the increase in output. Financial incentive, achieving personal bests, and competing with one another, dramatically raised morale, and happily boosted our company profit. (Be careful that quality doesn't suffer.)

Remember: People work harder at play than they do at work! When an organization promotes fun, employees have greater self-esteem, enthusiasm, energy, and team spirit. Their positive attitudes translate to higher productivity, more creativity and innovation, and better customer service.

"Managing by the numbers" can transform teams with poor performance into teams that run efficiently and win games. Measurement is vital to success! (see common business measures)

Make "Fun" a Business Strategy

So, let the kid out and have some fun. Turn your business systems into meaningful games and keep score. Give feedback and praise. Celebrate victories. Reward outstanding performance.

In their book, “Motivating Employees,” Ann Bruce and James Pepitone wrote:

"Top organizations such as Southwest Airlines, Ben & Jerry’s, Starbucks, Disney, Nordstrom, Wal-Mart and Microsoft use fun as an organizational strategy. These leaders have realized that when employees are having fun, they just perform better."

Related Article:
Business Leadership: Six Ways to Increase Worker Desire and Capability

 

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Tags: Business Systems, Culture, Business Measurement

The Balanced Scorecard for Small Business—Set Goals!

Posted byRon Carroll

Organization leaders generally have a pretty clear picture of the direction they want their company to go. However, research shows that just 5% of the workforce understands their company’s strategy, and only 25% of managers have incentives linked to that strategy (Kaplan).

To help remedy this, Doctors Robert S. Kaplan and David P. Norton of Harvard Business School introduced the Balanced Scorecard in 1991. It has gained wide acceptance as an effective strategic management system, a performance measurement system, and a communication tool.

Simply put, the Balanced Scorecard enables organization leaders to convert mission, vision and strategy into specific and measurable goals, with action plans to achieve those goals. And it's actually quite easy to do.

The scorecard is described as “balanced” for the following reasons:

  1. It recognizes the need to balance financial indicators of success such as sales with non-financial indicators such as customer satisfaction (business measures).

  2. It balances internal requirements of employees and processes, with the external requirements of customers and shareholders.

  3. It looks at past performance (lagging indicators) such as financial statements as well as current performance (leading indicators) including the measurement of daily business systems and processes.

  4. Finally, it provides a balance between short-term and long-term objectives.


A completed Balanced Scorecard will not only link your business strategy to measurable company goals, but it aligns employee efforts and business processes to those objectives. It is the foundation for creating a culture of continuous improvement!

Balanced Scorecard

The Four Perspectives of Balanced Scorecard Goals

When setting Balanced Scorecard goals, you will look at your business strategy from four different perspectives.

  1. The Financial Perspective promotes strategies for growth, profitability, cash flow, return on investment, and mitigation of risk, as viewed by an owner or shareholder.

  2. The Customer Perspective promotes strategies for creating product value, market differentiation, and customer loyalty.

  3. The Internal Processes Perspective promotes strategies for developing high-performance business systems and processesoperational excellence.

  4. The Learning and Growth Perspective promotes strategies that create a culture of continuous learning, innovation, and the personal growth and retention of valued people.


While a Balanced Scorecard may seem like a tool for big-business, it is simply a form divided into four sections, one for each of the four perspectives. In column one, you write several objectives within each perspective. In column two, indicate a unit of measure such as numbers, dollars or percent. In column three, express the target goal in that unit of measure. In column four, briefly indicate your plan of action to achieve the target goal.

Below is an example of an abbreviated Balanced Scorecard developed by a home builder.

Financial Perspective (How can we increase growth, profitability, cash flow, and return on investment?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Increase Sales growth
Number of new housing
starts per month
10 new starts Expand geographic market / open new office
Improve profitability Percent income from operations 10% profit margin Reduce construction cycle time and unit costs

Customer Perspective (How can we create product value, market differentiation, "killer customer care," and raving fans?)

OBJECTIVE
MEASUREMENT TARGET ACTION PLAN
High-quality homes Points / quality rating of subcontractors Subcontractor must maintain 90-point average of 100 possible Create a “quality” score sheet for each sub and provide them job feedback
Fast completion
Average days to complete 30 days from building permit to close Intense scheduling system / reduce delay

Internal Processes Perspective (What systems can we create or elevate to achieve operational excellence?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Fast Start—Minimize time from contract to building permit Days in-process Submit application to city within 5 days of customer contract Reduce upfront interface and preparation time with customer
Effectively schedule sub-contractors Percent of work started at scheduled time 75% of jobs started within 1 day of schedule Purchase BuildStar management software

Learning and Growth Perspective (How can we promote learning, innovation, and the personal growth and retention of valued people?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Subcontractor certification Number of subs that are certified 75% of subs are certified Create subcontractor certification program
Improve staff building-process skills Number of skill sets times number of people 80% skill competency Create a staff training program


For instance, let's say from the financial perspective you want to increase sales by 20% next year. Your unit of measure is dollars. Your target goal is $1,000,000, and your plan of action is to spend 20% more money on lead-generation advertising.

In another example, from an internal-processes perspective, your goal is to reduce product defects. Your unit of measure is a percent. Your target goal is 99% yield, or expressed as 1% waste. Your action plan is to apply Six Sigma analysis to the manufacturing process and dramatically reduce production errors.

System Scorecards

The Systems Thinker also aligns goals at the system or process level with the major Balanced Scorecard objectives of the company as described above.

Let's take a closer look. A company Balanced Scorecard has an objective of 10% sales growth in the coming year. The action plan is to add six more sales per week. Based on the sales conversion rate in this example, the marketing department must receive twenty-four additional leads each week. To achieve this, their action plan for this System Scorecard objective is to increase the weekly advertising mailers by 1500. Likewise, the production department must increase its target to manufacture six more units per week.

Every department plays a role in accomplishing the high-level company goals.

By cascading the strategy and objectives down through all levels of the organization, every employee and internal process is engaged in achieving a common set of goals. People throughout the organization ask, “Which company objectives or measures are we in the best position to influence?” and “What can we do at our level to help the organization achieve its goals?”

Strategy is everyone's job in a Balanced Scorecard environment. It is a top-down responsibility to communicate strategy and unite the workforce, and a bottom-up responsibility to internalize and execute the strategy.

In one page, your Balanced Scorecard tells the whole story—everything important—about your organization's current strategy and targeted objectives!

I have prepared several worksheets to help you determine your unique business strategy and create a company Balanced Scorecard. You can get them in the Zone.

 

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Tags: Business Systems, Improvement, Business Measurement, Customer Retention, Financial Systems

Do You Know Your Key Performance Indicators?

Posted byRon Carroll

In 2002, Billy Beane, general manager of the Oakland Athletics baseball team, stumbled upon something that changed the game of baseball. His discovery could also be a game-changer for YOUR company!

After a dismal start, Beane’s team of unknowns and misfits stunned the baseball world by setting a record with twenty consecutive wins, and finishing first in the American League West. What amazed everyone was his ability to accomplish this with a team salary of one-third of teams like the New York Yankees—41 million dollars compared to 125 million dollars. His cost per game-won was the lowest in baseball.

Billy Beane was given a relatively low operating budget by the Athletics’ owner, Lew Wolff. He lost three of his star players to teams that would pay higher salaries. Billy was desperate to put together a competitive lineup. One day he met Peter Brand, a nerdy accountant from Yale who crunched baseball statistics. Peter looked at the game through a different lens; he saw numerical connections no one else saw.

Key Performance Indicators

The collected wisdom of baseball insiders—players, managers, coaches, scouts, and the front office—over the past century was subjective and often flawed. Players were judged and paid by their batting average, home runs, runs batted in, base steals, and so forth—well-publicized key numbers that fueled the weekly chatter of baseball commentators and fans.

However, Peter showed Billy other key performance indicators (KPIs) that were more accurate in predicting a player’s contribution to winning games.

  • On-base-percentage – how many times a player gets on base (by a hit, walk, or being hit by a pitch) as a percent of times at bat.
  • Slugging percentage – total bases divided by at-bats.

These two numbers proved to be far more effective at determining a player’s value to a team. Against everyone’s advice, Billy Beane hired players who were not the most popular, not in their prime, not the highest in batting average or home runs, and not the players who commanded attention or big salaries. He stayed within his budget by signing underrated players for bargain prices who had above average on-base and slugging percentages.

In the years that followed Oakland’s success, many major league teams changed the way they valued players to a different set of key performance indicators, now referred to as Sabermetrics (from SABR - Society for American Baseball Research).

After the “Moneyball” revolution, Billy added a KPI for defensive efficiency (percentage of balls put into play by opponents that resulted in outs), and in 2010 his team allowed the fewest runs in the American League. Whatever you measure gets better!

Key Performance Indicators

Business measures are often expressed as a ratio, that is, a numerator divided by a denominator. In his book, “The Game of Work,” Charles Coonradt describes these measurements as the "Results to Resource Ratio (RRR)"—how much is being accomplished with the resources available. For example, these measurements may appear as:

  • Sales per person-hour (sales-dollars is the result, person-hour the resource)
  • Ounces of gold per ton of rock (ounces of gold the result, ton of rock the resource)
  • Average sales dollar per customer visit
  • Defective units per million units produced
  • Service calls per maintenance contract
  • Sales dollars per square foot of floor space
  • Board-feet cut per machine hour
  • Profit per mile driven

Do you see how this works? It is a useful way of looking at things. By focusing on the most important results and the most expensive resources, you will find it easy to see which vital few business systems or processes have the most influence on “winning games.”

Coonradt teaches that managers are responsible to turn resources (at bats) into results (total bases). The more efficiently they do this, the more successful they are as managers.

What Key Performance Indicators Drive Your Business?

While you may find it valuable to measure the performance of any business system  (numbers are the language of improvement), there are only one or two critical numbers that drive the "economic engine" of your organization. If these numbers are good, everything else falls into place.

For example, most football fans judge game performance by the scoreboard. However, one of the coach’s KPIs may be the number of third-downs converted to first-downs. If the conversion rate is high, the team is moving the ball and probably scoring. A consistently high third-down conversion ratio correlates to a winning season.

In his book, "Good to Great," Jim Collins describes the key measurement for several large companies. They include: Pitney-Bowes—profit per customer, Wells Fargo—profit per employee, Walgreen's—profit per customer visit, Kroger—profit per local population, and Nucor Steel—profit per ton of finished steel.

Manage by the Numbers

Faithfully measure your core business processes and diligently work to improve their results. Establish measurements that let you know every day how you stand in relation to your goals.

Take a little time now to determine the one or two key performance indicators that drive the success of your organization? Focus attention on your most important results and your most expensive resources.

A thoughtful approach to determining your KPIs could produce the next game-changer for your company!

 

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Tags: Business Measurement

What are Some Common Business Measures?

Posted byRon Carroll

In a well-run organization, leaders manage by the numbers. They measure and monitor business performance to improve results, and to guide their problem-solving and decision-making. These numbers can be expressed as leading indicators (real-time) or lagging indicators (historical). A few key numbers drive the success of every company—including YOURS!

Manage by the Numbers

Balanced Scorecard Measures

Performance measures are often established using a tool called the Balanced Scorecard. These measures reflect a company’s current strategy and goals. Below are some commonly used measures within the four perspectives of the Balanced Scorecard. Focus on the few numbers that matter most to you, and ignore the rest (unless they later become important).

Financial Measures

Sales or Revenue
Sales growth
Gross Margin or Profit
Contribution Margin
Profit Margin
Profit or revenue per employee
Return on Investment (ROI)
Dividends
Cash flow
Days in A/R (e.g., average of 75 days for collection of money)
Days Held in Inventory (e.g., 90 days of stock on-hand)
Inventory Turnover Ratio (e.g., four inventory turns per year)
Current Ratio (current assets divided by current liabilities)
Quick Ratio (current assets minus inventory, divided by current liabilities)
Debt to Equity

Customer Measures

Customer satisfaction
Customer retention/loyalty/referrals
Customer complaints/customers lost
Product return rates
Response time per customer request
Customer lifetime value
Customer acquisition rate
Number of customers
Annual sales per customer/Re-order rate
Average purchase per customer
Win rate (sales closed/contracts signed)
Marketing cost as a percentage of sales
Number of ads placed/response rate/proposals made
Sales volume/per channel/per square-foot of space
Frequency of sales transactions/mean-time between sales
Average customer size
Customers per employee
Customer service expense per customer

Process Measures

Average cost per transaction
On-time delivery/response time to customer requests
Average lead-time to ship product
Inventory turnover
Labor utilization and effectiveness rates
Defect percentage/Rework
Break-even point
Cycle time
Warranty claims
Waste reduction
Space utilization
Frequency of returned purchases
Downtime

Employee Learning and Growth Measures

Employees with advanced degrees/participation in professional or trade associations
Training investment per employee
Average years of service
Number of cross-trained employees
Absenteeism
 Employee turnover rate
Employee satisfaction
Reportable accidents/Lost-time accidents
Employee productivity
Training hours/certifications/leadership development
Personal goal achievement
Timely completion of performance appraisals

Financial Ratios

The above list will get you thinking about various ways to look at your business and measure performance. For more information, google the less-familiar terms you are interested in.

Many of the financial measures listed are lagging indicators known as business or financial ratios. They are often looked at by investors or bankers. Some of the common financial ratios are described with formulas at the following online locations:

NetMBA
Missouri Business
Online Calculator

Get everyone in your company behind the few critical numbers that drive your business strategy and goals. People should know every day how they are measuring-up. Frequent feedback is a powerful motivating tool.


Related Articles:

Numbers are the Language of Business Improvement!
Measuring Your Business Processes Pays Big Dividends!
Your Clues to Uncover Weak Business Systems!

Do You Know Your Key Performance Indicators?
Learn How to Do a Business Break-even Analysis (In The Zone)
Box Theory™ Gold Measurement Tools (screen shots)

 

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Tags: Business Measurement, Financial Systems

Ten Qualities of Exceptional Business Leaders

Posted byRon Carroll

The true measure of leadership is influence—nothing more, nothing less” (John, Maxwell, "21 Irrefutable Laws of Leadership”). Without influence, a person cannot lead. Regardless of who has title or position, the leader is the person that commands attention. Great leaders earn trust and respect as they emerge from the “refiner’s fire” with competence, character, and a pattern of success. The culture, values, and quality of an organization are always a reflection of its leaders.

Business Leader

Below are ten qualities I have observed in exceptional business leaders.

1.  Great Leaders have Clear Vision and a Passion to Succeed.

John Maxwell said, “The leader finds a dream, and then the people. The people find the leader, and then the dream.” In successful organizations, leaders have a clear vision, mission, and objective. Their singleness of purpose drives them forward through obstacles and challenges, and frequently beyond their comfort zone. They have an incurable passion to succeed, and seek to become the best in their field. They know where they’re at, where they want to go, and they work daily to get there.

Great leaders are prepared to pay the price for success. Failure is not an option. The higher their position within the organization, the greater the sacrifice they are willing to make to achieve success. “The right [leaders] will do everything in their power to build a great [organization], not because of what they will get in terms of incentives and compensation, but because they simply cannot imagine settling for anything less. Their moral code is ‘excellence for its own sake’” (Jim Collins, “Good to Great”).

2.  Great Leaders have a Specific “Game Plan.”

Effective leaders always have their eye on the goal. From clearly understood organizational strengths, weaknesses, opportunities and threats (SWOT Analysis), they plan their unique strategy—or game plan—to compete in a crowded marketplace. Great leaders focus their goals and action plans on the vital few things that produce the greatest results. They patiently and methodically pursue their objectives, adapting to change, persevering through hardships, and proactively turning problems into opportunities. They know their customer and employee expectations and work systematically to surpass them. The written strategy statement describes their “best-known way” of achieving the mission and vision of the organization.

3.  Great Leaders Create a Culture of Discipline and Excellence.

The culture within an organization has an enormous influence on performance. Great leaders value effective business systems, habits and patterns of discipline, commitment to results, and accountability at every level. “A culture of discipline involves a duality,” says Jim Collins. “On the one hand it requires people who adhere to a consistent system; yet, on the other hand, it gives people the freedom and responsibility within the framework of that [business] system.”

In a culture of discipline, great leaders face the brutal facts when performance is lacking, and continually seek innovation and improvement. They pursue the best over the easiest. Leaders cultivate a high degree of trust, respect, cooperation and partnerships with employees, vendors, and customers. They unite leaders and managers at every level to create an organization that is “greater than the sum of its parts,” aligning individual and team performance with the organization’s strategic objectives.

Generalized solutions, seat-of-the-pants operations, and employee discretion, are replaced with detailed procedures, performance standards and accountability. A culture characterized by “Results Rule!” discipline (Randy Pennington) is one of high-energy and a can-do spirit that values the contribution of everyone in the organization.

4.  Great Leaders are “Systems Thinkers.”

Effective business systems and processes are the essential building blocks of a successful organization. Great leaders view well-designed operational systems as the primary means to increase efficiency, accomplish objectives, and give customers what they want every time. They are the solution to frustrations, waste of resources, poor performance, and other daily problems.

Within a culture of discipline, great leaders pull together their talent and resources to create business systems and processes that consistently produce desired results. They understand that innovation and continuous improvement of business processes drive all growth and profit.

Great leaders are strong marketers and seek to develop high-performance marketing systems. They use accounting and financial data to measure the effectiveness of their internal business operations. The best leaders recognize that only when every critical system is fulfilling its purpose and delivering intended results, will the organization prosper. The daily work of great leaders is to inspire and guide the development of vital systems and processes within the organization.

5.  Great Leaders Measure Performance and Arm Themselves with Data.

Exceptional leaders sometimes make decisions based on intuition and experience; however, they continually seek facts and data about the organization. They are always aware of their key performance indicators (KPI's) and if they are achieving targeted objectives. The best leaders hold everyone—including themselves—accountable for measured results.

Great leaders know precisely what customers want and what competitors are doing better. They value the opinions of others, but rely on hard data to affect change within the organization. Effective leaders understand the principle that “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates” (Thomas Monson, business and religious leader).

Next week, I will discuss five more qualities of outstanding business leaders.

Related Article:
Ten Qualities of Exceptional Business Leaders (Part 2)

 

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Tags: Systems Thinker, Business Systems, General Business, Culture, Business Measurement, Business Leader

Sales Equivalency—The Surprising Power of Cutting Costs!

Posted byRon Carroll

Every dollar you save through cost reduction—one of the primary purposes of your business systems—is far more valuable than the dollars that come from sales. In tough times, cost cutting can preserve your bottom-line profit when your top-line sales are struggling. Let me explain.

A sales dollar is reduced by commissions and other sales costs, the actual expense of the product or service you are selling, and even administrative or overhead costs. In fact, a net profit is all that remains. For example, if you sell a $100 product, and you have an 8% net profit margin, that $100 sale will eventually put eight dollars in your pocket.  

On the other hand, if you save $100, THE ENTIRE AMOUNT GOES STRAIGHT TO YOUR BOTTOM LINE. YOU GET TO KEEP IT ALL!

Cut Costs 

Sales Equivalency 

Another way to look at this is to calculate the “sales equivalency” of your dollars saved. If your company has an 8% net profit, and you save $100, it has the same effect on earnings as $1250 in sales. The formula for calculating sales equivalency is as follows:

 

Amount of Savings ÷ Profit Margin = Sales Equivalent
($100 ÷ .08 = $1250)

 

The smaller your net profit margin, the greater the impact your cost reduction becomes. In the example above, if your profit margin is 5%, the $100 of savings has a sales equivalent of $2000; with a 3% margin, the sales equivalent is $3,333.

What is the sales equivalent of a $100 saved in your company?

Here are a few examples of eye-opening sales equivalents from our company with an 8% profit margin.

  • A tweak to a telephone system saving $50 per month is equal to $7500 in annual sales.

  • Preventing $1000 of lost, damaged, or obsolete inventory in a year produces the same financial result as $12,500 in new sales.

  • An annual saving of $5000 by finding a better supplier of materials or product, reducing freight cost, taking advantage of purchase discounts, and so forth, is worth $62,500 in sales.

  • An improved business system or process that can perform a task with one less employee earning $25,000 per year and no benefits is equal to $312,500 in sales. YES, THREE-HUNDRED AND TWELVE THOUSAND, FIVE- HUNDRED DOLLARS!

Impact on Profit 

Here’s another fact: The average small business has at least 3% waste or excess cost within its operations and often times much more. In our example of the business with 8% profit margin, 3% of waste equals 37.5% of lost profit (.03 ÷ .08). Remember: All waste comes straight off the bottom line!

Improving the quality and efficiency of your business operation—its systems and processes—is the gift that keeps on giving. The payoff continues year after year. In good times and bad, it’s always the right time to be cost conscious!

What's one way you could reduce costs today? Now, go do it!

 

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Tags: Business Systems, Business Measurement, Quality, Efficiency/Speed, Cost Cutting

Your Clues to Uncover Weak Business Systems!

Posted byRon Carroll

It's been my experience that many small-business owners don’t expect timely financial reports from their accountant and don’t use them to manage their business. BIG MISTAKE! 

Financial Report Clues

Your “Balance Sheet” and “Profit and Loss” statements provide a valuable report card of overall business performance. They reveal strengths and weaknesses, performance trends, break-even points, and other intelligence for decision making and problem solving.

This historical data is useful to stakeholders, investors, and bankers. However, its greatest value is to help YOU improve your business.

The Systems Thinker Advantage

As a Systems Thinker, you recognize that the numbers on the financial report point to business systems that are responsible for generating those numbers. 

You see the cause and effect relationship. The systems are the cause. The reported numbers represent the effect. If a number is disappointing, you can make it better by improving the faulty system at the source.

YOU are in control of your financial outcomes by being in control of your business systems and processes!

Systems are the Solution

Let’s consider a few business problems revealed by looking at a financial report, and the systems or processes that might be causing the undesirable numbers.

Income Statement

Sales revenue is down. Is your lead generation system attracting sufficient customers? Does your sales process successfully convert leads to sales? Does it include cross-sales and up-sales to maximize customer value? Is your pricing system giving you maximum dollars per sale? Is your customer-care system so good that customers keep coming back?

Margins are low.  Can you reduce costs? Could your purchasing system be improved to buy materials or products for less?  Could your pricing system be tweaked to increase sales or sales margin?  Could you improve your production or order-fulfillment systems to have more efficiency and fewer mistakes, returns, and rework?  Would an improved hiring, training, or incentive system payoff in greater employee productivity and reduced labor costs?

Balance Sheet

Accounts Receivable is high. Do you have an effective credit approval system? Is your collections system consistent and persistent? Could you change your sales terms to include full or partial payments at the time of purchase, or in ten days?

Cash reserves are low. Cash flow is poor. Is your inventory management system failing to keep the right products in the right quantities? Are you accumulating slow moving or obsolete merchandise, which ties up much-needed cash? Is a weak collections system leaving cash stranded in a bloated accounts receivable? Are profits dried up from inefficiency, waste, and too many ineffective business systems?

Count on Your Accounting System

Once trouble has been identified on the financial statement, you have no choice but to bear down and improve the system or process that is responsible. There really is no other way to solve the problem!

Remember: Accounting is your business system to measures the effectiveness of all your other operational systems; each of your core systems and processes should be accountable for a planned result. When they are performing at desired levels, happy numbers will appear on your monthly financial statement. Improved profit and cash flow will follow.

It all starts by developing good business systems and processes!

Next time your accountant provides you with a financial statement, put on your Systems Thinker glasses and peer through the numbers to identify the systems you need to elevate. And never forget that numbers are the language of business improvement!

Related Articles:
Measuring Your Business Processes Pays Big Dividends!
Do You Know Your Key Performance Indicators?

 

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Tags: Systems Thinker, Business Systems, Improvement, Business Measurement, Financial Systems

How to Calculate Your Business Break-even Point!

Posted byRon Carroll

Calculating a business break-even point is not difficult. However, there are a few things you need to know in order to make it as accurate as possible.

As a review, your monthly break-even point is reached when your gross sales revenue equals your total fixed and variable costs; it is the point that your business begins to make a profit. (Please read "Do You Know Your Sales Break-even Point?" for more about this principle.)

Get Your Profit and Loss Statement

To begin, you need a copy of your "Profit and Loss Financial Statement." If possible, get a printout that shows year-to-date information and the percent of sales for each line item. Divide the year-to-date total for each item by the number of months to get the average monthly expense (e.g., If your power bill through June is $2742, your average monthly power bill is $457). Averaging multiple months will minimize the effect of any unusual expenses in a single month.

Don't forget to include the monthly portion of line items paid on a quarterly or annual basis such as payroll taxes or insurance. For example, if your annual insurance charge is $9,000, use 1/12 of that amount, or $750, as part of your monthly budget for calculating the break-even point.

Categorize Costs

Looking at individual line items, you will first decide which costs are fixed, which are variable, and which are a mixture of both. Let's discuss each possibility.

  • Fixed Costs - These expenses are dollars paid or accrued each month, even if you don't make a single sale. They include such things as rent, insurance, utilities, equipment leases, contracts, accounting fees, and so forth. Fixed costs are sometimes referred to as overhead or administrative costs.

  • Variable Costs - These expenses are directly related to the products or service you deliver. They include line items such as materials, supplies, labor, and shipping expenses. Variable costs are generally referred to as cost of goods or cost of sales, and are best represented as a percent of sales. For example, the cost of materials and labor might be 50% of the sales price.

  • Mixed or Semi-Variable Costs - These costs are part fixed and part variable. If they are not broken out separately on your Profit and Loss Statement, you will have to estimate them for your break-even analysis.

For example, some of your wages may be administrative (fixed), while other wages are related to the products made or services performed (variable).

Your utilities, such as lights and heating are fixed; however, power to run equipment for manufacturing a product is a variable cost. The amount varies according to production demands.

If you have a marketing budget that is a percent of sales, this would also be a variable cost—the more you sell, the more you can spend on advertising. If you have a minimum monthly advertising expenditure or set media contracts such as radio, television or newspaper, these costs are fixed; you pay them every month, even if they don't generate any sales.

In a final example, let's say you hire a new sales person and want to use a break-even analysis to discover how much more you need to sell in order to cover his or her cost. If the sales person is paid a salary, the cost is fixed, if paid a commission, the cost is variable. Paying a salary plus commission or bonus would be a mixed cost.

I think you get the idea. Keep in mind that costs change and expenses tend to creep up. Recheck the numbers periodically. Caution: the break-even point is dramatically affected by hiring new people without a corresponding increase in sales.

Calculate Your Break-even Point

The formula for computing your business break-even point is described below. Don't worry if it doesn't quite make sense. I have provided a spreadsheet tool so you can just plug in the numbers. Remember to use amounts for the average month.

Break-even Formula

Lower Your Break-even Point

As mentioned in my previous article, there are four ways to reach your break-even point earlier in the month and begin making a profit sooner.

  1. Lower your overhead (fixed costs) - Keep fixed costs to a minimum and resist the temptation to increase them, unless absolutely necessary. It's very hard to go back if sales drop. However, don't cut costs too deeply, especially if there is a negative effect on customers or employees.

  2. Lower the cost of each product or service sold (variable costs) - By lowering direct costs, your gross margin will increase. Be diligent about purchasing material at the most favorable price, controlling inventory, or improving the productivity of your workforce.

  3. Increase your prices (and gross margin) - Most business owners are reluctant to raise prices because they think sales will decline. More often than not, that doesn't happen, unless you are in a very price-sensitive market. Raising prices only a few percent will have a significant effect on your break-even point. There is a delicate balance between sales volume and pricing, so be cautious about changes, and test if you can.

  4. Increase your sales - The toughest job of most small-business owners is to increase sales. A business owner nowadays must be an outstanding marketer, or able to hire one. Never stop trying to improve marketing and sales strategies. Keep the pipeline full. Push every order you possibly can out the door by the end of the month, and then do it again next month. You make all your profit on those last few sales. And remember, a bad month can wipe out the profit of several good months.

As a Systems Thinker, your first thought is, "What business process do I need to improve to reach my financial break-even point sooner in the month? How can I make my administrative systems—hiring, accounting, computer support, custodial—less costly? Can I improve my purchasing system to buy materials or supplies for less? Can I reduce labor costs without affecting customer service? Could I change my pricing system or terms to squeeze out a little more profit? Can I improve my lead-generation or sales-conversion processes to close more sales?

You might be surprised by how many opportunities there are to cut overhead costs or create more margin from the sale your products or services. Those opportunities are just waiting to be discovered as you work on your business in The Zone.

Motivate Your Employees

By the way, if you work within tight profit margin, it is a good idea to let employees know your break-even point. This gives them a clear picture of expenses and what it actually takes to run the business. It also motivates that little extra oomph at the end of the month to get orders done and out the door.

Many companies fail because owners do not know this single number—the sales break-even point. DON'T LET THAT HAPPEN TO YOU!

Related Articles:
Do You Know Your Sales Break-even Point?
Access a Spreadsheet for Doing a Break-Even Analysis

 

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Tags: Business Measurement, Cost Cutting

Do You Know Your Sales Break-even Point?

Posted byRon Carroll

Do you know how much profit you make each month, and when you make it? Would you be surprised to learn that you don't make a profit on every product or service you sell?

Here's how it works: Your business has fixed costs that you have to pay every month—rent, utilities, insurance, and so forth—even if you don't sell a thing. Hopefully, as you sell your products or services, you have money from each sale to begin covering those fixed costs. Sometime during the month, you will receive enough income to pay all the current overhead costs of your business—a significant milestone.

Up to this point, you haven't earned a dime of profit. Your money has gone to pay the fixed costs and the costs that went directly into the products or services you sold, such as materials, labor, shipping, and so forth. These are variable costs because they depend on how much you sell.

When Total Revenue = Total Cost

At the moment your revenue from sales is equal to your total fixed and variable costs, you've reached your financial break-even point. You begin to make a profit for the first time.

With a quick calculation, you can determine the sales volume necessary to accomplish this goal; however, it can be a little scary. Many businesses don't reach their break-even point and become profitable until the last few days of the month. Up to that time, they are just covering costs—passing income along to vendors, employees, and Uncle Sam

Sales Break-even Point

If your break-even point generally comes late in the month, and sales drop a little, you can find yourself on the last day with nothing to show for your hard work but a good time. There is no profit, and likely a loss. A new month begins and you start all over again to pay rent, utilities, insurance, and so forth. You can never change the financial outcome of the past month.

So, your objective is to reach the break-even point as early in the month as possible. The sooner you arrive at this all-important day, the sooner your profit begins to accumulate for the remaining days. The number of days left in the month after reaching your break-even point is your margin of safety. The more the better!

You can do four things—and four things only—to achieve your break-even point earlier in the month:

  1. Lower your overhead costs (fixed costs)
  2. Lower the cost of each product or service sold (variable costs)
  3. Increase your prices (gross margin)
  4. Increase your sales

Each of these strategies points to one or more business systems that need to be improved. Can you name them? 

A Margin Trick

Here's a trick to increase profit, but you have to be careful with it.

Our local Golden Corral Restaurant has a killer deal for seniors between 1:00 and 3:00 p.m. The price of the meal is low and covers the variable costs such as food and labor. It also contributes to the fixed costs, but the meal is not considered profitable. The upside for the restaurant is happy seniors who spread the good word, continuous sell-through of hot and fresh food during the slow time of day (less waste from sitting around), more productive employees, additional seating space for full-price customers during the busy dinner hour, and an overall increase in sales dollars.

Beware: This discount tactic also lowers the margin on the average meal for the restaurant. However, the upsides mentioned more than compensate for the downside. While the profit margin as a percentage of sales goes down a little, the total number of profit dollars goes up! The problem comes when you discount too much and lower the gross margin on your product without an adequate upturn in sales volume. You've just cheapened your whole business and not improved your break-even point.

Which Describes Your Business?

I've seen companies hit their break-even point half way through the month and make a boat load of money thereafter.

I’ve worked with businesses that reach break-even near the end of the month and wonder where their profit is and why they are always struggling with cash flow.

I've also seen companies frequently fall short of their break-even point. They get along for a while living off cash from a decreasing inventory and/or vendor credit terms, but they are doomed unless they apply one of the four remedies described above. After all, profit is the lifeblood of every business!

Do you know what your break-even point is—at what time during the month you begin to make a profit? A Systems Thinker knows the answer to this question. Check out the links below to learn how to calculate your break-even point.

Related Article:
How to Calculate Your Business Break-even Point
Access a Spreadsheet for Doing a Break-Even Analysis

 

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Tags: Business Measurement