A Four-Step Approach That Will Make Your Business Profitable To make this strategy work, you need to know the numbers behind your business.
By Scott Miker
Opinions expressed by Entrepreneur contributors are their own.
What gets measured gets done. Yet, most small business owners ignore the metrics in their business. They intuitively know what to do, so they bypass the most crucial tool to help make the right decisions to keep the business thriving.
It is easy to wing it. It is easy to make snap decisions based on your gut while telling yourself that you can't measure anything worthwhile in your company.
This is a major mistake.
Importance of tracking
I have overseen the operations of several growing businesses. One of the commonalities of the most successful was that we spent the time to measure our key performance indicators (KPIs).
We didn't take the growth for granted. We needed to make sure we knew the rate at which we grew. We needed to track everything to ensure we continued to improve our efficiency and effectiveness. This allowed us to scale and gave us the foundation to make major decisions. We could reference the KPIs to confirm our gut instincts and challenge us when they were wrong. It also gave us the ability to continuously improve without risking what we already built.
Plan, do, study, act
Dr. W. Edwards Deming was a famous statistician who was known as one of the great leaders in quality improvement. He created an approach to improve businesses known as the Deming Cycle, and business leaders have used this in almost every aspect of business since it became popular.
The Deming Cycle is comprised of four parts:
- The first part is to plan. This is where we establish benchmark outcomes and develop the strategy for the proposed change.
- The next step is to do. This is where we implement the strategy. When we did this, we would often segment out part of the process to test our ideas. It could be to use a small subset or A/B test the idea.
- Then we study the results. We measure the outcomes from this process. We compare those to our benchmark data from the outcomes we observed following the standard process. Was there an improvement? Was there a regression? Comparing the outcomes from the old process with the results from the new process told us whether it made us better.
- The final step is to act. This means we decide if this new process is better or worse than our old standard. If it is better, it becomes the new standard process that everyone uses. If it is worse, we revert to the old process we had been using.
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Continuous improvement through the Deming Cycle
Deming's four-step process allows us to constantly improve all aspects of the business. We can apply this methodology over and over again. We can take suggestions from our team and test them out.
We don't worry about an idea being flawed. We don't ignore great suggestions because we are afraid to change. Instead of relying on the mantra, "That's the way we have always done it", we take feedback and see if it works or not.
This is a great strategy to keep improving instead of growing stagnant in our processes. But the key is that we have to have benchmark data to know where we stand.
The Deming Cycle of Plan, Do, Study, Act, works when you are focused on the metrics in your business. Without a metric-focused approach, you will try out different ideas without any real sense of whether they improved things. We need to know that if we continue to follow our process, we will get a certain range of results. Then, when we apply a new idea, we measure the outcome to see if it is better or worse.
Instead of continuous improvement, you will change for the sake of change. You will get haphazard results and oscillate up and down.
Related: Anticipation is the Key to Success
What to measure first?
Now that you can see the value in measuring aspects of the business, what should you measure?
Every business is different. Every department and task requires a unique approach. But almost everything can be measured.
We can measure aspects such as sales calls volume, revenue, time doing a task, and the number of interviews set. We can also track first call resolution, cost per unit, throughput, number of errors per batch, net promoter score and expenses.
When I set up KPIs for a business, I always want to think about the value for the business. What does the business value? What is the value proposition? Those became the starting point.
If the differentiator for the business was quality and efficiency, I would measure the accuracy of each department and how quick they were to complete a task. If the differentiator was providing a low-cost alternative, then everything went into measuring costs to reduce spending.
Once you establish some key aspects that you want to measure, you decide how you are going to measure those things. Sometimes this is easy. With today's technology, it is a safe bet that the tools you are using already have built-in dashboards. Or they contain reporting functionality to give you what you need.
Most ERP and CRM systems give you a great deal of reporting options out-of-the-box. Decide what is important for your business and then find the report that gives you that information. Then, track those areas over time.
The more you do, the more of a trend you will start to see. Trend analysis gives you a great look into where each area is headed. Is the department getting more efficient or more sluggish? Is the quality getting better or deteriorating? Studying the trends gives you that information.
Some business systems are lacking in their ability to provide quality metrics. Sometimes the ERP can't report what we need. Or there are artifacts in the data.
Often, I resort to dumping data out of the system and doing my own analysis in Excel with pivot tables, VLOOKUP's and good old-fashioned formulas.
On occasion, I would even bypass the software program altogether and have the staff handwrite their time logs. These would then get transferred into Excel at a later time. This can be inefficient and cumbersome in today's technological environments, but the key is that we needed to see the numbers to confirm how we were performing.
Measurement leads to improvement
Once you start measuring something, that area begins to improve.
The numbers spotlight performance. People want to do a good job, so when you give them clear goals around important metrics, they shift their focus and work to reach a higher level. And those that resist, if they underperform, can be coached up or coached out of the organization.
Even your focus will shift. You will see the artifacts of your decisions in black and white. Instead of assuming every decision that you made was right, you will see how it impacts the performance of the business, good or bad.
Many large corporate businesses take metrics and KPIs to the extreme and create a bureaucratic nightmare. Most small businesses run from these structures and systems to remain flexible. In either case, the optimal approach is more balanced and centered. We need to use metrics to help improve the business without letting them get in the way of progress.
So, if your business relies on gut decisions and observations alone, realize the power of metrics. Understand that the time spent developing the right KPIs will accelerate your business growth and give you the systematic approach necessary to keep growing and improving.
Related: 3 Reasons Entrepreneurs Struggle When Building Business Systems
