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Creating and Using the RIGHT Business Measurements 

Drucker5789.jpgThe great management thinker Peter Drucker has been quoted as saying “you can’t manage what you can’t measure”.  True, and if you can’t manage it, you at least need to know what impact it can have on you and your business.  But what about the things you can measure?

Then you change one little word and have, “you can’t manage what you don’t measure”. But, just because you can measure something, should you?  Does the measurement provide value for the organization? 

Measurement Gone Wrong

Liz Ryan wrote in a Feb 10, 2014 article in Forbes, “We love to measure things, because it makes us feel as though we're really doing something”.  She goes on to say, “Measurement is our drug in the business world, because we believe that by measuring everything and sending the good news upstairs to the C-suite we can ward off the bogeyman of business, namely Getting On the Boss's Bad Side”.

In any given business, there are hundreds, if not thousands of things that can be measured, but measurement itself is not a value add to any business. Interpreting the measured results in context of the organizational goals, strategies, and tactics and creating action plans is the value add. 

Think of your last financial statement review, operations meeting, or department meeting.  Did you review KPI’s, ratios and goals?  If so, was there discussion about the activity trend? What about drilling down into the cause of any movement in the measurement?  Are we measuring things to measure them, or using them to actually maximize value?

Unknown-6.jpegIf you are new to measuring things, I don’t want to scare you off; I want to make sure you are being as effective as you can be and not engaging in activity for the sake of activity, or because someone said you should. 

Creating measurements and using them to make decisions is of utmost importance. And you need to make sure you are measuring the right things.

Creating the Right Measurements for Your Organization

A good starting point for measurements is a simple set of ratios from your financial statements that give you a picture of where you stand financially and some key results of operations.  We will be expanding on these financial ratios in the next article, because every stakeholder needs to understand them.

Besides financial ratios, you will want to have a way to measure your operations.  Are you as efficient as you want to be?  How do you know how efficient you should be?  What are the best measurements for your company?  Your industry? 

We will talk about it in a future article, but understanding the difference between leading measurements and lagging measurements and where they fit in your plan can make a big difference in how valuable the information is to the people using it.  The C-suite should be looking at different information than the line supervisor, but they both need to have their measurements.

Here are qualities of good measurements:

  • The data is easy to get. Time consuming and arduous efforts to create a measurement decrease its value.
  • It reveals information about the company position or a value-creating activity.
  • It can be included in a group of measurements. There should be a relationship with at least one other metric that can be expected to move in a predictable pattern when compared.  This will validate the data the measurement is using and confirm the measurement’s correctness.
  • The measurement is specific enough that the next step of analysis is clear.
  • The measurement is appropriate for the level of the organization using it.

If you aren’t measuring things now, think about the information you are missing in your decision making process. We will be discussing various measurements over the next several posts.  If you have any questions please leave a comment.

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