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Value Creation Blog

When You Measure It You Improve It

Posted by Josh Patrick

key performance indicator1 resized 600One of the first activities I recommend in instituting a quality control program is to first understand what the important measurements in a company are.  It might be profits, gross profit, labor cost, or any number of other financial measurements.  When you figure out what the important Key Indicator is in a company you and your company have started down the road of improvement.

You will often find your Key Indicators are either ones that exist in your profit and loss statement, your balance sheet, or a calculation based on either of these documents.  I believe that Key Indicators are not especially important in creating value in a company.  Instead think about your key indicators as being historical markers.

Instead it’s the drivers that create value.  A key performance indicator is the needle and drivers are the things that move the needle. You won’t find drivers in your profit and loss statement, balance sheet, or cash flow statement.  It doesn’t mean that these reports aren’t important.  It does mean that if you want to improve the value of your company there are other measurements that are likely much more valuable.

Drivers are things that will make your company worth more.  Drivers can be individualized for different parts of your company.  Once you understand how to develop drivers you are on the road to having your employees help you make your company better.

Drivers should be individualized for different parts of the company.  When I was in the vending business our key performance indicator was improving our cash position.  Different parts of the company would each have key measurements that helped us improve cash.

  • The vending route drivers would have a measurement for how much merchandise was sold every time they opened a door on the vending machine.
  • The mechanics would have a measurement for how many service calls would be repeat calls.
  • The commissary where food was produced would have a measurement for how many dollars were produced per hour.
  • The warehouse would have a measurement for what level of inventory they had in stock when a new shipment came in.

All of these measurements didn’t exist in our balance sheet.  All of them would help move the needle of our key performance indicator of improving the amount of cash we had.

Having good drivers gets another benefit.  The major benefit of having different measurements that drive KPI’s is that it allows you to post graphs and reports around your company that show progress.  When you post graphs you will usually find performance improves for activities that drive your Key Performance Indicators.

I’ve found this outcome was not only true in my vending company, but every company I’ve worked.  I developed a saying that grew out of this phenomenon, “That which gets measured gets done.”  I’ve found that just measuring something will automatically help improve the measured results. 

When people can see what they’re doing they start thinking about what they can do to make their number better.  Sharing information helps when it comes to make your company better.  If your company shares information you will probably see results better than your competitors that don’t. 

I believe this is because our employees do want to make our companies better and their jobs easier.  When we provide information to help them our associates will think and take actions to help both things become reality.

I’ve written a special report on putting together key metrics in your business.  This report helps you understand some things you can do to find numbers for your people to measure.  Click on the button below to get your complementary report.

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Topics: business coaching, enterprise value, Key Performance Indicators (KPI)

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