BY MARK FAGAN
With Patrick Gallagher
Any business, at its core, is a collection of people working to provide goods and services that meet clients”™ demands while generating profitable returns.
In order to realize and maximize those returns and internal efficiencies, CEOs and other top executives must be actively engaged in the strategic planning process.
The previous installment of the CEO Evolution series discussed the need for those top executives to have less of a hand in day-to-day operations and a greater role in the development and implementation of strategies that can drive business growth.
In other words, CEOs must start by managing through key business drivers.
Key business drivers are indicators that each have a major impact on the performance of your business, something that is measureable and can be compared to a standard ”“ such as a budget or last year”™s figures or an industry average and perhaps most important, something that can be acted upon.
There are certain key business drivers that vary from industry to industry, but many apply across the board. They include:
Revenues: It”™s important to separate revenues by location, employee and/or product, etc. That breakdown of revenues should then be analyzed on a monthly and annual basis, allowing management to see which part or parts of the business are growing, which are contracting, and why.
Gross profit: Likewise, before you can maximize profits, you have to know where the problems and opportunities are. Being able to determine and report profit at the lowest level of activity for your company (by location, employee, product, customer, etc.) will give you that ability. If you can”™t, you”™re operating with a blindfold.
Customer growth: The ability to attract new customers is the lifeblood of a business, and is where everything originates. So who is bringing in these new customers? What is your best product? Which location is consistently adding to the client base? Why do some people and products fail, while others succeed?
The flip side is customer attrition. Customer loyalty is tested in tough economic times, but attracting new customers is more expensive and time consuming than holding onto existing clientele. Finding out why a repeat customer has chosen to take their business elsewhere is critical.
Inventory turnover: If your business involves the sale of goods, you know inventory levels represent a double-edged sword. Capital converted to inventory may give you something to sell and purchasing or producing large lots may be more profitable. But, once that conversion is made, your product is at risk to lose value ”“ not to mention the space and personnel required to store and manage inventory.
You need to understand your inventory requirements, lead time and volume discounts on a product-by-product basis and track them monthly.
Accounts receivable turnover: Cash is king and customers easily become conditioned. If you allow them to pay for products in 60, 90 or 120 days, that is exactly what they will do. They will use your company as a line of credit (interest free)!
As you can see, it”™s a common theme: Most business drivers need to be identified and reported at the lowest level of activity.
Your company”™s revenues could be growing rapidly, but if, upon closer inspection, that growth is the result of one or multiple salesmen giving the farm away, your gross profit could take a hit.
Having the ability to get a clear determination of the performance of your employees will help you put the appropriate people into the appropriate positions, and will ultimately help motivate them to improve.
The caveat? The important word here is “key.” Realistically, management can”™t track 15 to 20 key drivers on a weekly or monthly basis; something in the range of five to eight might be more achievable.
And as was stated in the first installment of this column, your success will depend on your ability to delegate to the management. If you have someone who heads up an office or division, that person should monitor the key indicators for his or her office and report back to you.
Mark L. Fagan, CPA, is the managing partner of Citrin Cooperman”™s Connecticut office. Citrin Cooperman is a full-service accounting and consulting firm with offices in Norwalk, White Plains, New York City, Philadelphia and Livingston, N.J. Mark can be reached at mfagan@citrincooperman.com or (203) 847-4068.
