The great thing about sport is that there is some sort of scoring system that lets you know who is winning and who is losing. Of course with having a score you also get the anguish, excitement, exhilaration and disappointment that goes with it.
Business is also a game that people win and lose at. Yet most businesses don’t have any sort of scoreboard at all. As a business coach I find that the only scoreboard many businesses have is the tax return that is often completed 12 months or more after the end of the financial year. And then the main score that people focus on is how much tax they had to pay. The less the better! The trouble is if they aren’t paying much tax in most cases that means they aren’t earning much money.
Also, it never ceases to amaze me how many ‘supporting scores’ there are when you listen to any sporting commentary e.g. tackle count, time in possession, shots on goal, score assists, handballs, forced errors, unforced errors, first serves in etc. etc. All these supporting scores or Key Performance Indicators (KPIs) are ways for the coaches and players to measure the activities the lead to the final result on the scoreboard.
In business there are also many KPIs that measure all the activities that go on that lead to the business succeeding. For example, revenue, gross profit, number of leads, ‘conversion rate’ of leads to sales, customer satisfaction, employee satisfaction etc.
KPIs help business owners and sports coaches to identify what is working and what isn’t working in a business or a game and give focus to the key areas of activity that need to improve. For example in a business, do you change your advertising to try and generate more leads or better quality leads? Do you change the way you present your quotes or tenders? Do you try and increase your average sale by ‘up-selling’ e.g. McDonalds sells millions of dollars of fries per year by asking ‘do you want fries with that?’
Building Your Own Scoreboard
A great place to start developing a scoreboard and KPIs for your business is to go back the very basics. Start with working out if you actually have a sustainable business model that will bring you the type of prosperity and lifestyle you dreamed of when you started.
Recently I was working with a mechanic Peter and his wife Sarah, about how they could increase the profitability of their business. They pay themselves a basic wage each year but for the past four years haven’t made a profit and were losing faith in the business.
What is the Break-Even?
We started by setting up a Business Model on a spreadsheet (you can do it with a pencil, paper and calculator as well) and listing the fixed costs for the year so we could work out what the break-even was for the business each week and month.
You Need to Pay Yourself
Next they added in an industry based wage for themselves and then a reasonable net profit figure. They said they would like to earn a profit of around $50,000 to make running the business worthwhile (and it would help pay off a chunk of their mortgage).
[Next: Revenue, Variable Costs and Gross Profit]
Revenue, Variable Costs and Gross Profit
The next step was to work out how much revenue the business needed to earn. A lot of business owners make the mistake of focusing on the total revenue of the business. A more important figure is the revenue earned less the variable costs or ‘costs of goods sold’, that are incurred with each job. Every time Peter and his team fix a car, they are using up car parts and consumables like oil, filters etc. So the next step was to estimate what percentage of each job went in variable costs.
Sarah does the books and the first thing she realised is that they didn’t have a process for quoting. A lot of quotes were based ball on park figures and what they thought a customer would be willing to pay. As a starting point they agreed that 50% of the revenue for each job went in parts and consumable products.
This gave them one of their most important KPIs, their Gross Profit figure – the money left over from each job that was going to pay all the fixed costs, wages and profit.
We took things a bit further and looked at other KPIs like how many leads they needed, the jobs they needed to win and complete each week to achieve their targets.
If It Isn’t Written Down, It Doesn’t Exist.
They were shocked then they first saw the results but at the same time amazed at how much clarity it gave them then they saw it all written down. To start with it all seemed too difficult but within a few days of playing around with the figures and with a bit of advice, they developed some very firm strategies. They put up their prices up on some services, cut their costs, developed a process for quoting and reduced the time it took to do jobs.
It is amazing how much motivation and focus there is for business owners when they know what activities or KPIs to measure in their business so that they get the best score possible.
Peter and Sarah now know what they have to focus on to get the business performing so that they can earn a decent wage and make that $50,000 profit to pay off the mortgage.
Andrew Vincent is a business coach and creator of the Channel 9 television series Your Business Success. Over 80 of the best episodes have been re-edited into a step by step business improvement program that is supported by FREE business coaching. Go to www.yourbusinesssuccess.com.au/db to find out more and access FREE video clips to improve your business skills.
