“As long as there’s cash in the bank, I know we’re doing a good job.” I’ve met dozens of business owners who lead their organizations with this mantra. However, this has many ways of being an inefficient way of determining if your business is performing up to expectations or exceeding goals. One problem with only focusing on cash in the bank is that you aren’t focused on many aspects of the company that present themselves as opportunities for improvement prior to the cash hitting the bank account. Here are a few examples:

• Job Specific Profitability
• High achievers or high performers’ production covering up the lack of production by others.
• Marketing campaign effectiveness
• Capital expenditure allocations and opportunity cost

All this to say that focusing on cash accumulation isn’t a bad idea. Obviously, you need cash in the bank to run your business. What many business owners miss is the opportunity to create levers in their business that they can move up and down depending on what’s needed. These levers could also be described as Key Performance Indicators, or KPIs. 

When you’re truly focused on making your business a money generating machine, one that has consistency in process and performance, you begin to understand that you need to have ways of quickly identifying opportunities for increased performance. On the front end, these KPIs serve as this function. Some of the clients I have worked with to develop KPIs for their business end up using some version of these:

1. Production Team Efficiency (Billable Utilization)
2. Marketing Campaign Effectiveness
3. Days Sales Outstanding (DSO)
4. Current Ratio
5. Liabilities to Earnings Ratio

I’ll explain these further in my next article. For now, it’s important to understand the concept of a KPI; this indicator tells you things about your business so that you can adjust things accordingly.

Once the basics of KPIs are understood, many business owners ask me this; How do I develop KPIs for my management team? Essentially, this is the question asked by business leaders who want to “train up” their leadership team. There should be a set of KPIs that the entire business operates from and then there are role specific KPIs and department specific KPIs which will guide the business. This is especially true for companies that want to scale, want to live out the principles of EOS learned through Traction, one of my favorite business books, or those who want to stop waiting for their accountant to tell them if they had a good quarter. 

As the six business leaders, each of whom led either a team of people or are responsible for the efficiency of equipment/assets of one of my clients reviewed the Strategic Plan we developed for their business over the next 5 years, I couldn’t help but study their expressions. Typically, when my team and I develop Strategic Plans with clients, there’s a component that involves clarifying, developing, or essentially officializing the way the business will measure it’s success. We call this KPI Development. 

My team and I had spent the past few months meeting with senior leaders, reviewing reports, mapping out different functions within the business, all in an effort to articulate and demonstrate our knowledge of their business’s core functions; the ones that drive revenue, have the most risk, and need to be measured carefully to ensure the business is ready to scale. 

At this meeting, we were working on the business, which is a common phrase that you’ll undoubtedly hear my ask if we ever meet. It usually is in the context of determining if the focus of a meeting or conversation is meant to work on the business or in the business. The main difference here is that working in the business is what technicians do and sometimes entrepreneurs get trapped into spending all their time in this zone instead of pulling back and being intentional about time spent working on the business. This is typically time spent creating strategic initiatives, hiring new talent, arranging financing for expansion, or reviewing the business from a high-level perspective. The other hidden trap here is that no business owner should spend ALL their time in either zone. The key is to find the right balance between the two for the given season of the business; some business’s seasons require leaders to roll up their sleeves and get to work in the business while other seasons demand more time spent working on the business.

In this particular meeting, reviewing the Strategic Plan we developed, we were being very intentional about our time in working on the business. I could tell the light bulbs were going off by the way these normally subdued and reserved executives were nodding, sharing positive quips with one another, making notes in the margins, and all around actively participating in the topic at hand; do we have a logical and simple way of evaluating each leader and each department so we can scale effectively with each team member fully aware of how their contribution impacts the company’s goals. 

Some entrepreneurs may say this is a dream. This organization decided to put their dream to work and make it happen. 

The key, as I’ve found in working with hundreds of businesses to develop collaborative Strategic Plans is this: Make the KPIs so simple that anyone can understand them, everyone knows how they work, and what their impact is on the organization. We do this through 5 simple steps.

Step 1 – Collaboration – No Strategic Plan or set of company objectives or list of goals can be accomplished without truly getting the entire team involved. This starts with collaboration. Our process includes meeting with key leaders and team members to understand how their role fits into the bigger picture, what things they’re focused on, and what processes they manage, touch, or impact. 

Step 2 – Transparency – Transparency is the next step as each leader needs to be able to quickly and directly dial into the exact point in a business process so they can manage the process, not the people. Business consultants, business leaders, and any one else who thinks that people need to be micromanaged as a way of building culture or a brand or driving results is sorely mistaken. Many studies have been done around the art of micromanaging and managing the process, especially one that everyone took part in articulating and identifying the KPIs for, is always more effective than managing people. You have to have transparency into the process and manage from there.

Step 3 – Setting Objectives – Once you have the team’s buy-in and there’s transparency into the specifics of a business function, it’s time to set objectives. This is important so the team can stay focused on the goal at hand. It’s even more effective when the team members can see and understand the individual benefits when the company hits its objectives. 

Step 4 – Consistency in Language – Consistency in language is one of the key points in Traction and I’ve found this business principle to be exceedingly true across every industry I’ve worked in, every business meeting I’ve been a part of, and in every conversation with business owners. There could be the two smartest people in a room, talking about the businesses needs but if one person is talking about productivity of the team with words like “utilization” and “billable hours” while the other person is using terms like “effectiveness” and “labor efficiency” they might be on two different pages, get frustrated, and not come away with a mutual understanding of exactly what needs to be done. The business terms used in the workplace for any business need to be consistent across emails, job performance evaluations, goal settings, templates, and in KPI Development.

Step 5 – Accountability – The last step is where the rubber meets the road. It’s accountability. People can be held accountable if the action items are simple enough. They can be coached. In fact, many of the business owners I work with end up thanking me for instilling accountability in their organization by saying some version of, “my team is really stepping up now and they all want to achieve. Now that they know what is expected of them, they actually want to hit the goals.”

The two owners of the business I mentioned having the meeting with called me the day after the meeting and said this, “Matt. Thank you so much for preparing this for our team. The mutual feeling is that everyone here now feels like they have a very clear vision of where we’re headed as an organization, and, perhaps more importantly, what they need to do to make it happen.”