The Systems Thinker Blog

Business Improvement: Manage by the Numbers!

Posted byRon Carroll

You now understand that systems are the solution to your business challenges. Good systems increase efficiency, accomplish objectives, and give customers what they want every single time. Your business accounting should be the master system that measures the effectiveness of all your business processes—the operations of your business.

Think of your business as you would the human body. The body is a complex organization that has an important job to do. It must perform with exactness and on tight schedules. To accomplish this, the body uses systems that work together—the circulatory system, respiratory system, digestive system, nervous system, and so forth. The brain manages all of these systems and works to keep the body healthy and functioning properly.

The brain of your business is the accounting system. It processes all of the data related to the activities of the business and provides owners with strategic information to drive profitability and growth. “Managing by the numbers” is the method successful owners and managers use to operate a business that is also healthy and functioning properly.

Manage by the Numbers

Discover the true value of accounting

In many small to mid-size businesses, accounting is seen as the system used for paying the bills, reconciling the bank, invoicing customers, or preparing a tax return. It should be much more. It should be the system for gathering business intelligence.

Renowned business authority Peter Drucker says, "You cannot manage what you cannot measure." To which Michael Dell, of Dell Computers, adds, "Anything that can be measured can be improved.” Business accounting is the measuring and reporting arm of the business.

Accounting information reveals the strengths and weaknesses of a business operation (see SWOT Analysis). It tells the business owner what went wrong in the past and what can be done to improve in the future. Accounting systems reduce large quantities of complex data to simple and understandable information. This information contains the seeds of solutions for all business problems and is the basis for making mission-critical decisions.

Accounting systems bring all the resources of the business to bear on the creation of profit, the lifeblood of the business. When an accounting system is utilized properly it can make poor men rich. If ignored, it can make rich men poor. It is the most under-utilized tool of the average small-business owner. Even professional accountants do not always extract its full value.

Let's take a closer look. Business activities generate numbers, regardless of whether the owner pays attention to them. These activities are the specific daily processes and systems that create sales, produce products, train employees, service customers, and so forth. Strong accounting systems organize the numbers to produce a wealth of relevant information for running the business. For example, business intelligence may tell owners and managers:

  • "The company must do $100,000 per month to break-even."
  • "It takes an average of 52 days to collect accounts receivable."
  • "The plant is running at 76% of its capacity."
  • "Sales are up by 8% over last year."
  • "Labor costs are running 2% higher than budgeted."
  • "It costs an average of $400 per sales lead."
  • And much more!

The steady flow of information creates a reservoir of knowledge from which business decisions can be made. Good decisions will save or earn the owner far more than the cost of acquiring the information. The accounting system may tell the owner to hire a salesman, and what the new break-even point will become. It may tell him to discontinue an unprofitable product line, buy a new piece of machinery or raise product prices, and by how much. He or she will benefit by knowing the optimum level of inventory to stock or what should be the expected result of more advertising.

Owners make the best decisions when information tells them the financial effect their decision will have on the business—before they ever spend a dime! The outcome of managing by the numbers is better management, control, profitability, and customer satisfaction.

Counting vs. Accountability

Many business owners mistakenly think the root of the word "accounting" is "counting." They know their sales for the month, the bank balance, and how much money they owe vendors. Savvy business owners understand the root of "accounting" is not "counting," but "accountability." Each business system or process is accountable for a planned result.

Ask yourself:

  • "Is my lead generation system producing the expected number of sales leads?"
  • "Does our quality control system keep product returns at an acceptable level?"
  • "Is my employee incentive system boosting productivity?"

Effective accounting insures that all business activities are working together to produce profit. "Counting," or bookkeeping, is an overhead expense of doing business. "Accounting" is an investment that pays big dividends. Don't be without it!

Strategic information leads to financial control

To develop the perfect business requires a disciplined and systematic course of action. The business owner must understand where he is at, where he is going, and how he is going to get there. He uses strategic information and systems to achieve financial control. If managed and grown properly, the business will be profitable, reward stakeholders, and create financial and personal freedom for owners. Accounting plays a central role.

Managerial accounting is the art and science of managing by the numbers. Regardless of who does your accounting, you need it done. You need it done right. And you need it done right now!

One final point: Every business has one or two "key numbers" that drive its economic engine. If you have knowledge and control of these numbers, everything else falls into place. What are your key performance indicators? If you do not already have them identified, do so now, and get help if necessary. Attention to these key numbers will make all the difference to your success.

By the way, if "numbers" aren't your thing, which describes most people, be humble. Hire a "numbers person." If you get the right person, I promise it will be worth it!

The next major systems you must develop or refine are marketing and sales. A business will not exist for long if it does not have an effective system for getting customers in the door.

Step 5: Become an Obsessed Marketer
Back to Table of Contents: 10 Easy Steps to Grow the Perfect Business





The Next Step...

Tags: Business Systems, Measurement, Financial Systems

8 Characteristics of Good Business Systems!

Posted byRon Carroll

How do you know when you have good business systems such as lead generation, customer care, hiring, order fulfillment, and many others unique to your organization?

Well, the best answer to that question is whether your business systems are hitting their mark, whether they're getting the intended results. Stakeholders, customers, and employees are also feeling pretty good about your operation. And, you don’t kick the dog when you go home at night. But let’s be a little more specific.

Good Business Systems Hit the Mark

Hitting the Target

Does your business system or process include the following eight characteristics?

  1. The system is designed with the customer in mind. (Does this system help turn your customers into loyal fans?)

  2. The system represents your best-known way of doing something. (Be honest. Is this the best you can do, or could you make the process better?)

  3. The system has one primary purpose. (What is the single objective of this business system, and does it help you accomplish your company objectives?)

  4. The system has an owner. (Who is accountable for, and reports on system results?)

  5. The system is as simple as possible, documented, understood by workers, and repeatable. (Is your system in writing? Are your people motivated and capable?)

  6. The system has performance standards, and results are measured. (Improvement requires measurement. Are you "managing by the numbers"?)

  7. Workers get ongoing feedback about system performance and are recognized for good results. (The more frequently people get feedback, the better they perform. Do you celebrate victories?)

  8. There is a sufficient focus on system details to eliminate most bottlenecks, inefficiencies, waste, and rework. (Every process has waste. Have you reduced it to a minimum?)

Never Stop Improving

Your small business can become a great business if you have a never-ending desire to improve. Do you have the will, the pig-headed determination to create business systems and processes with the characteristics described above?

You’ll know you have arrived after you go on a month-long vacation and find the business running smoothly when you return? Now, that's a goal worth working towards! Wouldn't you agree?

Polish one or two systems at a time. Before you know it, your whole business will shine. And keep in mind, Box Theory™ Software will enable you to create exceptional business systems and processes with all eight of the essential characteristics—AND IN HALF THE TIME. Let's get going!


The Next Step...

Tags: Business Systems, Quality, Efficiency/Speed, Getting Started, Measurement

Six Qualities of Highly Effective Business Systems!

Posted byRon Carroll

There is only one way you can create a smooth-running and prosperous business that reaches its full potential. It is by developing effective systems and processes that enable you to continually find and keep customers.

Creating effective business systems is the art and science of "business engineering." It requires creativity and innovation (art) as well as logic and organization (science). System development is your primary task as a business owner. Please read further.

Business Systems are Art and ScienceSystems = Art and Science
Above image is "fractal art" generated by mathematical calculation

The operational systems you create must combine six important elements. They include the following:

  1. Process: Effective systems—in the store, the office, or the factory—are well designed, smooth running, evenly paced, and use standardized procedures. They seek to eliminate idle time, mistakes, downtime, unnecessary movement, bottlenecks, and inventory buildup. You make money when your systems are stable, steady and sustained.

  2. Components: A system must have all the necessary components to function properly, such as checklists, forms, reports, equipment, software, supplies, tools, equipment, people, and other resources. Missing or poor-quality system components are a major weakness of most small businesses.

  3. People: People are often the most important and most expensive system components. Put the right people in the right job with first-rate training, incentives and accountability. Effective business systems leverage ordinary people to produce extraordinary results.

  4. Quality: Good systems have minimal mistakes, waste, and rework that keep costs down. Products or services are delivered as promised and free of defects; they meet or exceed customer specifications and expectations. Any quality considerations that are critical to the customer must be critical to you, or the customer will take their business elsewhere.

  5. Speed: Efficient business systems have short lead-times and high throughput by squeezing delay, bottlenecks and "speed bumps" out of the process. They run fast enough to deliver on-schedule or by deadlines. Speed creates higher employee productivity and work satisfaction, increased capacity for sales, faster invoicing and cash flow cycles, happier customers who will buy again, and overall lower costs.

  6. Measurement: Renowned business authority Peter Drucker says, "You cannot manage what you cannot measure." Continuous measurement and feedback drive all process improvements. What measures drive the "economic engine" of your business? Establish process measurements that let you know every day how you stand in relation to your business goals. Strive to better your best!

When you carefully incorporate these six qualities into your business systems and processes, you will see remarkable results. Costs will go down. Customers will be happier. You will have an organization of excellence and be on-track to reach your full potential.


The Next Step...

Tags: People, Quality, Efficiency/Speed, Getting Started, Measurement, Systems

Manage By the Numbers!

Posted byRon Carroll

Mini-Course Day 9: "Fast Start to Systems Thinking"

In 1891, a British scientist named William Thompson, also known as Lord Kelvin, said, “When you can measure what you are speaking about, and express it in numbers, you know something about it. But when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.”

Managerial accounting is the art and science of managing by the numbers. It requires a thorough understanding of both leading indicators (real-time system performance) and lagging indicators (monthly financial statements). By measuring results and providing frequent feedback to managers and teams, it is possible for you to improve the performance of your organization in a dramatic way.

Business Accounting Includes System Measurement

Accounting isn't just for managing payables, receivables, and so forth. It is your primary system to measures the effectiveness of all your business processes—the operations of your organization. Its essential purpose is to help you maximize sales throughput and profit—the lifeblood of your business.

Your accounting system is the “brain” of your organization. It reduces large quantities of data into useful information. Numbers reveal your strengths and weaknesses. They tell you what went wrong in the past and what you can do now to improve the future.

“Managing by the numbers” replaces gut feelings and opinions with business intelligence. It provides the seeds of solutions to problems and is the basis for making vital and informed decisions. You can know the financial effect of a decision before you ever spend a dollar! Good decisions will save or earn you far more than the cost of acquiring the information. So don't skimp on your accounting system!

"You cannot manage what you cannot measure" (Peter Drucker, business authority).
"Anything that can be measured can be improved" (Michael Dell, Dell Computers).

With business systems and processes, the types of measures you will apply include productivity, quality, timeliness, cycle time, resource utilization, and costs. In Box Theory™, we use a simple "Balanced Scorecard," developed by two professors at Harvard Business School, to establish measures and set target goals.

What are Your Key Performance Indicators?

A few key performance indicators (KPIs) drive the "economic engine" or your organization. If these results are good, everything else tends to fall into place. You should decide what those key numbers are for your company and watch them closely.

Key numbers may include ratios like profit per square foot of space, profit per customer visit, sales leads per day, sales conversions per presentation, defective units per thousand produced, and so forth. You get the idea. In this ratio, focus on your most important results (numerator) and your most expensive resources (denominator). What are the one or two KPIs that drive the success of your organization?

Select your measurements carefully, and only measure what you will use. Establish process measurements that let you know every day how you stand in relation to your goals. Keep in mind that the earlier your measurement system catches a problem, the sooner corrections can be made. Begin now to manage your company by the numbers; let measurable results drive improvement of your vital business systems and processes.

By the way, if you are not a numbers person, or don't have a numbers person in your organization, get one now! In this highly competitive world, you have to manage by the numbers to be successful.

"In God we trust. All others, bring data” (W. Edwards Deming, Total Quality Management).

The Box Theory™ Way relies on data for teaching, improving, and making important decisions. You will learn about baseline data, benchmark data, trend data, diagnostic data and other ways to look at a problem. Numbers are the language of improvement.

Now get this, just by measuring your business systems or processes—without making any changes to them—your performance will increase. Sweet!

My Box Theory™ eCourse will help you know what to measure and how to measure, and Box Theory™ Gold software has a built-in report wizard for creating fully-formatted measurement reports in seconds. Your performance data will also show up on the system dashboard.

Other valuable information and articles, such as how to do a sales break-even analysis, are available from within the Box Theory™ Business Systems Academy. Please check out our numbers on the pricing page, and let's get going today. This could be the start of something big.

Oh, and one last reminder, tomorrow is the final day of the 10-Day Fast-Start Mini-Course. If you are ready to get going, I hope you will take advantage of the special pricing before time runs out. Until then...

Return to Table of Contents
Mini-Course, "Fast-Start to Systems Thinking"


The Next Step...

Tags: Measurement, Mini-Course