Believe it or not, the last place you should look is at the financial statements. Financial statements are rearward looking. Whatever is happening in the business, by the time it appears on the financial statements, it is already history. Nothing you can do about it.
So while financial statements are fine for keeping score, they are only score-keepers. Not score-makers. You need to understand the impact of your actions, upstream. Here are the x key factors you need to understand:
• Know where you stand on orders at least once a day. Every single day. I have worked for companies that measured orders on an hourly basis. I would bet McDonalds measures orders down to the minute. Orders are the life-blood of the business. They are your early warning system that something is wrong. If at any time you have a significant softening in orders, find out why-fast.
• Next up is gross margin. Measure that at least monthly. Slice and dice it by product line and by customer. Your goal here is two-fold. One, is the margin eroding with a particular product or customer? If so, find out why and fix it. Second, your goal should be to improve the margins by a point or two every year.
• The margin analysis will often lead you to cost of sales. Don’t let your manufacturing guy tell you the way to improve cost of sales is by raising prices. Leave pricing and cost of sales as two separate issues. If a price increase is in order, which should only be because the market will allow it-it should never be because your cost of sales are too high. So examine cost of sales on its own. If you haven’t already, you need to get your company on a journey to lean. If you haven’t already, your purchasing people should be developing new sources for raw materials as a hedge against price increases.
• Product development is the future of your company. As a percent of total sales, how much of your sales are new products launched in the last several years? If this isn’t at least 20%, your future is in jeopardy.
• Finally, the culture in the company is a key factor you should understand. Does the culture serve the company by reinforcing its goals or does the culture exist for its own sake? Many CEO’s dismiss culture as something the health and happiness people do. That is a big mistake. I have said before that every company needs a culture of “Cirque de Soleil” performers. People who who push the envelope every day. People who are fanatical about excellence, precision, and teamwork in everything they do. Creating such a culture is very difficult, which is why most CEO’s don’t do it. They’d rather stay with the “hard” stuff, like cost of sales. But I can tell you from experience that if you build a Cirque de Soleil culture, the hard stuff will take care of itself.
About the Author
With more than three decades of management, executive, consulting and speaking experience in markets all over the world, Miller Ingenuity CEO Steve Blue is a globally regarded business growth authority who has transformed companies into industry giants and enthralled audiences with his dynamic keynotes. He may be reached at www.StevenLBlue.com.