Measuring the Success of Business Plans

 

By Jim Hingst 

After you
put your business strategy into action, you need to measure your progress to
see if your employees are working the plan and if the plan is working.

 

Business metrics, also called Key Performance Indicators (KPI), provide your shop with way to measure and record actual performance against company goals. The most important goals are those that ultimately impact your bottom line, such as sales revenue, profit margin, sales expenses, scrap rate, qualified sales leads, website traffic or social media followers. You can group these goals in fundamental categories, which describe the principal activities of a shop: sales & marketing, financial and production.

 

Your KPIs should define the critical activities necessary to achieve your business goals; the metrics or yardsticks used to measure performance for a specified time; and the target value compared to a previous performance value. The importance of the KPIs is that it provides you with a picture of how well your shop is doing in achieving your goals.

In reporting the progress that you are making on your plan, you should run reports on either a weekly or monthly basis, when appropriate.

In managing a marketing program, we ran weekly reports. In working with young salespeople, you can use the reports as a starting point to coach them. The report and coaching sessions can also provide you with all the information you need to generate a rolling sales forecast.

 

Sales & Marketing Measurables

 

  

Measuring your outcomes against your business goals is critical to improving performance. In sales you can use last year’s numbers as your benchmark to gauge performance.

 

In measuring your telemarketing activities, you could record the number of new prospects added to your database. You could also track the number of prospecting phone calls that you and your employees are making in a week. For each activity, you need to establish a goal for that activity, such as 30 new entries per week to the database or 50 prospecting calls per week.

 

You should have some means for capturing the data from the activities. Sales and marketing activities are easy to record if you use some type of automated Customer Relations Management (CRM) program, such as Salesforce.

 

You may not have the time to do a deep dive on every activity within your business. Nevertheless, you should keep in mind Tom Peters’ business maxim. “What gets measured, gets done.” Here are some activities that you should consider measuring:

 

• Revenue Growth. While nothing is more important for your business than profit, you will never grow your profits without growing revenue (another name for your company’s sales). That’s why tracking monthly sales and comparing actual performance to your sales budget is so important.

 

Failure to meet your numbers can alert you to problems within your business or with the economy, which should trigger a corrective response.

 

• Keeping your sales funnel full is critical in generating new business. That’s why you should record the number of prospects added to your database along with the number of qualified leads generated each week for sales. This should be easy to track if you utilize a CRM program.

 

• You should monitor the time it takes for sales to respond to leads and qualify the opportunities. Too many sales opportunities are lost simply because they slip between the cracks. This is a job for a sales manager. If you don’t have one, you can assign this responsibility to an inside person doing your marketing.

 

• One way to measure the effectiveness of your sales people and the quality of the leads provided is to compute the number of sales closed compared to leads supplied.

 

• Each month you should measure your sales cost (salaries, benefits, travel and entertainment expense and commissions). Determining your expenses to keep sales people on the road is critical in calculating Customer Acquisition Cost and your Sales Cost Ratio.

Example:

Sales Cost
Expense	Month	Year
Salary and commissions	$6250	$75,000
Benefits	$3000	$36,000
Travel & Entertainment	$2083	$12,000
Total	$11,333	$136,000

 

  

• To calculate your Sales Cost
Ratio, divide the monthly sales cost by the monthly profit generated. The
Sales Cost Ratio exposes whether your salesperson produces sufficient profit to
justify what you are paying him or her. If your sales expenses are out of
balance with profits, you need to either generate more revenue, cut costs or
charge more for your products and services.

 

Example:

$11,333 (monthly sales cost)/$12,500 monthly
profit = .91

 

• Customer Acquisition Cost represents all of your sales costs and marketing
expenditures divided by the number of new customers that you acquire for a
specified period. Sales and marketing expenses include your sales costs along
with advertising expenditures, salaries of marketers and any overhead
associated with sales and marketing. The Customer Acquisition Cost is important
because it reveals whether you are producing a sufficient return on your sales
and marketing investment.

 

Example:

$15,000 monthly sales & marketing
expenditures / 25 new customers = $600

 

• Contract Value is a key factor in creating a rolling forecast.
Whenever a salesperson qualifies a lead, they should assess the value of the
opportunities as well as when the sale is likely to occur. This is information
which the salesperson should enter into your CRM program. They should also
input this into your rolling forecast along with the probability of making the
sale.

 

• Win Rate. To
evaluate the performance of your salespeople you can calculate their Win Rate
which measures success in closing sales as a percentage. In computing their Win
Rate, you divide the number of sales won or closed by the total number of sales
opportunities that are either won or lost. You can use this rate as an
indication of a salesperson’s probability of success. This number is useful in
creating a rolling forecast.

 

Example:

25 sales won/58 sales won and lost = 43%

 

 

Using a CRM Program

Customer Relations Management Software (CRM) is essential in measuring your shop’s sales and marketing activities and easily
generating reports.

Subscribing to a CRM program allows you to
capture detailed customer and prospect history from your sales and marketing
activities. This information is critical in analyzing customer needs and market
trends.

 

What’s more, a CRM program provides you with a
database of your customer base and sales prospects, which you can use when you
initiate email blasts; direct mail marketing packages; conduct telemarketing
campaigns.

 

In creating account profiles, CRM system can
help in recording key contacts, information on competitors, problems with their
current graphics program, history of past purchases and new sales
opportunities.

 

A CRM system is only as good as the information
entered. As the saying goes, garbage in, garbage out. For a CRM system to work
in your operation, your marketing and sales people must be committed to input
accurate and detailed data. You also need to take the time to analyze the
information that the program provides in monitoring sales and marketing
performance and to make changes to your business plans when needed.

Financial Measurables

 © Can Stock Photo / everythingpossible

 Some of the most effective and easily
accessible KPIs are captured in your financial reports, which include
your Cash Flow Statement and Income Statement, also called a Profit & Loss
Statement or P&L.

 

These financial reports provide a snapshot of
your business’ past performance that you can use to plan for and predict the
future as well as to track or monitor progress toward your goal.  

 

• A Cash Flow Statement provides a snapshot of how well your shop manages the
cash coming in and going out of your business.

 

• Generated monthly or quarterly, your Income
Statement can provide you with a snapshot of your shop’s primary
operations. Careful reading of your income statement can help you run
your business. Some of the primary measurables that the income statement
includes are: 

• Revenue (Sales)

• Cost of Goods Sold (COGS)

• Gross Margin

• Shop and Administrative Expense

• Profit

 

The basic
format for an Income Statement is: Revenue – (Cost of Goods Sold + Shop and
Administrative Expense) = Profit.

 

Cost of Goods Sold are your
direct expenses incurred in production of your products. This includes direct
material, direct labor and other direct expenses. My story on job costing
explains what constitutes direct costs.

Shop and Administrative Expenses are
your Overhead. Tracking these expenses is essential to accurately calculate
your burdened shop rate. For most shops, these expenses are fixed.

 

In other words, if there aren’t
significant changes to your business, shop and administrative expense should be
relatively the same from one month to the next. Any major change in these
expenses, should alert managers to a problem.

 

On the other hand, if your shop is growing rapidly, you need to
regularly monitor expenses, because they will likely grow too. You need to
account for any changes, because these costs affect your hourly shop rate.
Below are some of the expenses that fall into this category:

 

Shop
and Administrative Expenses

• Salaries
and benefits (does not include raw labor charged to jobs)

• Rent

• Office
Supplies

• Gas and
Electric

• Phone
Expense

• Vehicle
Expense

• Travel
and Entertainment Expense

• Insurance

• Marketing
Expenses

• Legal
Costs

• Accounting
Services

In an effort to reduce expenses, you should create an
expense budget divided between fixed and variable costs. While you may not have
control over fixed expenses (rent, salaries, interest), you can control your
variable expenses, which include advertising, travel and entertainment. A
budget provides a picture of what you intend to spend, and compared to actual
expenditures. It also gives you a way to compare current costs to last year’s
expenses.

  

Gross
Profit Margin. You can calculate
gross profit from the information on your income statement. Expressed as a
percentage, you compute gross profit by subtracting cost of goods sold (COGS)or
direct costs from your revenue. That amount is then divided by revenue
multiplied by 100%.

 

Gross profit represents how much money is left from a sale
after you deduct your direct costs (raw materials, direct labor and other
direct). It does not, however, include your overhead (shop and administrative
costs).

 

Each business is
different. A large screen printer may have an objective of operating at a gross
profit margin of 60%. By comparison, a small sign shop could have a goal of
selling at a 75% gross profit, which represents keeping direct costs at 25%.

 

Gross
margin is also important because it indicates how much money you have left to
pay for your overhead expenses as well as how much you will need to sell to
break even.  What’s more, after you reach your breakeven point, you
can predict how much profit you will earn.  

 

For
example, if your monthly overhead expenses are $21,250 and you price your
products at a 75% margin, you need $28,333.34 in monthly sales to break even.
Sales greater than your break even point less direct expenses is gross profit.

 

Example:

Sales x
.75 = $21,250

 

Sales =
$21,250/.75

 

Break
Even Point = $28,333.34

 

Profit. The
ultimate measure of business success is profit. At the end of the year, if you
have more money than you started with at the beginning, you are more or less
successful. If you have less money, you need to make some changes in your
business. Usually, corrective actions include generating more revenue, reducing
costs or increasing selling prices.

 

Production Measurables

 

© Can Stock Photo / dizanna

You
can rate the productivity of your shop in a number of different ways. These
include comparing the actual labor hours charged to jobs to the total number of
manhours available. If you are either a screen printer or digital printer, you
can compute the number of hours a printer is in operation compared to the total
number of hours available. For digital printing, you can measure actual
throughput in square feet on a press versus its machine capacity. How you
measure the efficiency of your shop is relative to your written goals. Read Setting Goals for Your Business.

 

One
of the best ways to determine shop performance is to compare the actual raw material
and raw labor charge to your jobs with these direct costs in your estimate. If actual
labor and material exceeded the estimate, a manager needs to ascertain if the variance
resulted from errors in costing or problems in manufacturing. In estimating, a corrective
action may be adjusting unrealistic standards. An investigation of production could
reveal problems in planning, wasteful practices or job performance. Read Job Costing for Sign
Shops and Printers.

Other
ways to gauge production performance include tracking cycle time, changeover time
and scrap.

 

• CycleTime measures the time to manufacture a finished product from the order
date to the date of delivery. This key performance indicator reveals how
efficiently your shop produces jobs. It should also set off an alarm, if you
have problems in your manufacturing process.

 

• In
a job shop such as a screen printer, changeover time is extremely
important. It measures the time it takes to clean up a press at the end of
production through setup of a new job.

 

Scrap. In
a job shop such as a sign company you can measure scrap by tracking actual raw
materials used versus your estimate. Any variance in the numbers will indicate
a fault in costing or it can reveal problems in production. Possible production
problems could include poor production planning, or rejected graphics that did
not meet your quality standards.

 

Returns
and Allowances. Your income statement also should have a
line item for Returns and Allowances. Returns are the defective or unacceptable
products for which dissatisfied customers want refunds. In many cases, this
represents the added cost for rework. Allowances can also take the form of
discounts to unhappy clients as compensation for lower quality work.

 

You
can use Returns and Allowances as a metric to gauge the quality of work that
your shop produces. It is valuable because it directly affects your bottom
line. This is money lost for defective work.

 

Capacity
Utilization. As sign shop equipment, such as digital
printers and plotters, have become more expensive, monitoring machine capacity
utilization has become increasingly important. Failure to maximize machine
capacity adds to your cost of producing products. It may also reveal problems
in production or other areas of your business.

 

You can track unused machine
capacity in a couple of ways. The first is to record the actual number of hours
in operation versus the total number of hours possible in production capacity.
For example, if a press is running 100 hours (an average of 5 hours a day times
20 work days in a month) during a month out of possible 160 hours (8 hours a
day for 20 work days in a month), the unused machine capacity is 60 hours or 37
½%. 

Productivity. One way to gauge your
productivity rate is to use labor tickets to record labor hours for each job.
This allows you to calculate the ratio of actual hours charged to a job
compared to hours spent on non-production activities.  Tracking actual
hours in production against your estimates also allows you to adjust your
estimating standards or to alert you to problems in production.

Measuring your
KPIs in production can help you recognize and examine problems in your
manufacturing system. Correcting issues related to personnel, machinery and procedures
will aid your efforts in making incremental improvements in your workflow and
the quality of your products.

 

Communicating
the production KPIs with your associates makes them aware of any needed
changes in process, job performance, technology or training. It can also draw
attention to any investments that you need to make in equipment, maintenance or
additional skilled personnel.

 

In measuring
the performance of your production process, select those factors that most
directly have an impact on your goals. Since you most likely do not have time
to measure everything, select those KPIs that are easily quantifiable along
with those factors that your workers are capable of controlling.

Conclusion.

“When it is obvious that the goal cannot be reached, don't change the goal, adjust the action steps.”  Confucius 

The importance of
measuring your results, once you execute your plan, is that your outcomes tell
you whether your plan is working. That way, you can modify your plans and activities or make other adjustments within your
organization. 

  

You should never feel
any shame if you need to make changes to your plans as you travel toward the
end of your journey. You have probably have heard the metaphor of airline pilots
flying toward their destination. For most of the trip, the plane veers off track
for any number of reasons and the pilots must continually make course corrections.

 

That’s why, in your
role as a manager, you need to constantly measure the results of your
activities. If you fail to meet deadlines or produce desired outcomes, you need
to modify your goals or adjust your plans.

 

In fact, you should
expect the unexpected to happen. It is not if you will face obstacles to get in
the way of achieving your plans, it is when. In the words of the famous German
Field Marshal Helmuth von Moltke: “No plan survives contact with the enemy”.

 

When faced with the
inevitable adversities of business life, an unofficial slogan of the Marines provides
guidance: “improvise, adapt and overcome”.

 

 

Remember that the 5 steps in a
successful business strategy include:

 

1. Setting
Goals for Your Business

2. Developing
a Plan

3. Executing
Your Business Plans

4. Measuring Your
Outcomes