You’ve heard it all before, how important it is to write down your goals. Most people will agree, but never actually write them down.
It’s one thing to know what you want your goals to be, but writing them down and then measuring whether you’re reaching them is the best way to actually turn them into reality.
The success of your business largely depends on the performance of your people. By working with your people and negotiating your goals, they’ll take ownership of those objectives and be more motivated to accomplish them.
As a CEO or business owner, if you are not clear on the goals of your business or the progress toward those goals, how can you expect your employees to understand the direction of the business and for them to be focused on those goals?
The process of writing down your objectives should not just be done by the company’s leadership. It should be a collaborative endeavor that involves upper and middle management, as well as lower-level employees.
Written goals provide a way to tie an employee’s performance to company goals that are driven by measurable objectives—revenue, profit, and client satisfaction.
When is the last time you thought about how your key business drivers play a role in the profitability of your business? Understanding the drivers of your business success (or failure) will help you to align the objectives to reach your goals. Have you actually outlined your goals and identified these drivers that will ensure success? Have you discussed your goals and objectives with your people? What are you doing now to monitor progress and ensure that your business is on the right track for growth?
Develop Key Business Drivers
Technopedia identifies a business driver as a resource, process or condition that is vital for the continued success and growth of a business.
Of course, everyone wants to make more money, but knowing what affects your business’s performance is essential for long-term success and growth. It’s critical to keep in mind that this knowledge stems from your entire team and not just the senior executives. It’s a collaborative effort between management and employees, across the board. Being aware of your performance drivers, and sharing those drivers with every employee, will unify your company under these common objectives and goals to strive for.
In order to identify your business drivers, look at current and past performance as internal benchmarks. This varies from business to business, but these top areas are a good place to start if you’re unsure:
- Sales - Where are your leads coming from? What activity will cause sales (WCS)? How well does your pipeline provide visibility into future results?
- Cash flow - Where is your money coming from and going to? Do you have enough currently, and how can you improve your future cash flow?
- Employee retention - What is your turnover rate? How much knowledge walks out the door when someone quits. Are your employees happy and engaged?
- Client retention - How long do clients stay with your business? Are you getting the right, highly profitable clients and at a sustainable rate?
You need actionable statistics to monitor your business drivers. Those actionable statistics are called: Key Performance Indicators or KPIs. These are the predetermined, measurable drivers of a company’s success. These are the statistics that you as a CEO or business owner must monitor to help your businesses run better, grow faster and make more money.
You can monitor the status of your business drivers on key performance indicators (KPIs) by establishing a company scorecard that tracks important metrics tied to each driver. Measuring and comparing benchmarks against your company history is the first step to making data driven decisions and having financial transparency. This is what we call Keeping Score.
The traditional way that most businesses try to keep score is through their monthly financial statements. However, an income statement and balance sheet aren’t actionable.
They only show the historical results of a business’ financial performance. Those documents don’t provide insight into how the business got to that point, or what needs to be done to change those results in the future.
That’s where Management Accounting comes in.
Understand Your Unit Economics
Management accounting is the study of unit economics. Unit economics break down a business profitability down to its most basic element, so you can understand profitability by whatever way you organize your company. Once you understand your unit economics, you can measure what drives its success and make decisions based on those KPIs. If done right, management accounting turns accounting from a back office necessary expense into an integral profit generating tool. Management Accounting helps you to make data driven decisions, even if that means helping you understand what business you’re really in.
Here are some examples of 3 KPIs to monitor past, present and future performance:
- Total Revenue (income): Your total dollar amount earned. This is a great starting point to see the state of your billings. If gross revenue is increasing, make sure to plan whether you’ll need to hire – if it’s decreasing, it’s time to monitor activity reports on what causes sales and gain company consensus for trimming down and focusing on what’s most important.
- Gross profit %: This shows how efficiently your business delivers services. Many cash flow problems originate from selling business at a lower gross profit than expected. By monitoring this metric, you can focus on pricing jobs correctly and driving increased profits, and improve cash flow, as a result.
- ROI on total labor cost: This is your net income divided by total labor cost. It shows the profit on the investment made in your employees. With an increase, this means your revenue is spiking faster than your cumulative labor costs; with a dip, you need to focus your Human Capital Strategy to increase employee productivity in order to make more money.
Business Failure Can Lead to Success
Failure is inevitable in business – but that doesn’t mean you can’t learn from your mistakes and bounce back. As Theodore Roosevelt once said, “It is hard to fail, but it is worse never to have tried to succeed.”
Being afraid of failure is what often prevents CEOs from writing down goals. That's what prevents your business from progressing and reaching new heights. Be willing to pay attention to your numbers, listen to your team and acknowledge when things have fallen short, allows you to quickly pivot and focus on what you can implement to get back on track.
Writing down your financial goals is a substantial step toward success. It's the key to taking control of your business and increasing profitability.
Want more tips like this, such as how to improve your cash flow? Check out our eBook, “The CEO’s Guide to Improving Cash Flow,” and get 28 ways to gain efficiency and peace of mind.