Using a scorecard

Introduce a scorecard to give you an early warning system that all is not well.

Businesses of all sizes, be they large corporations or a newly-established small business, spend a considerable amount of time and effort developing well-thought out strategic plans that work to pave the way for their business’s success.  Yet, many of them fail to reach their goals.  

Frequently, it is because they are unable to measure their performance accurately and, therefore, only realise something is wrong when it is too late.  

Using a scorecard is a great way to improve the process of measuring your business’s performance.  A scorecard is a set of performance measures that are categorised according to the different performance aspects of a business.  Scorecards vary immensely in their appearances, content, and intricacy.

Some will include a dashboard that covers the broader performance goals of an enterprise and then expands them into more detail.  Others are colour coded to make it easier to scan through them.  

Using an automotive supplier as an example, one of the strategic performance goals in the dashboard of its scorecard may be “market leadership through building quality cars”.  Two performance metrics that contribute to the achievement of this goal may be “the percentage of reduction in annual warranty expenses” and “the percentage of reductions in car recalls”. 

When structuring a scorecard, it is important that you correctly identify what performance metrics are critical to the success of your business and need to be included in the scorecard.  If you answer the question well, the scorecard can make for an extremely tangible and concrete way to define success.  

In general, two types of performance measures should be included in your scorecard; those that account for the achievement of current operational goals and those that account for the achievement of future goals.  The best thing about scorecards is that they allow business leaders and managers to quickly understand how their business is performing overall and to identify if there is a performance gap in a particular area.  

Because they are structured to reflect performance across several business areas, when there is a lag in one area, it will stand out clearly.  This, in turn, allows the business manager to react immediately and solve the problem before it becomes too big to handle.  

If you are an entrepreneur with a growing business, constructing a scorecard will help you to better understand what functions of the business you need to work on to ensure that your business continues to do well. For those of you who are interested in assessing the current performance of a business, read my article “Discover 7 Common Causes of Cash Flow Problems in your Business before it is Too Late”.

Give yourself a holiday- free yourself from your business by systemising it.

Do you feel like you’re being held hostage by your business? 

Most small business owners start their business because;
a) they want to do something they’re passionate about; and
b) because they think it will give them more freedom in life by releasing them from the unreasonable demands of their boss.

After a few weeks, however, the truth hits them hard.  Running your own business is a whole lot more demanding than a full time job.  Instead of one boss, you now have ten; your clients, your suppliers, your employees, each with a different set of needs and expectations that have to be met by you. 

You are so busy running the business that you hardly have time for anything else.

But who ever said it has to be that way?  The key to running your business more efficiently and effectively is to systemise it.  Systemising means you have to establish an organised method of dealing with the different functions of your business – from employee recruitment procedures to financial transactions. 

You have to find a way to structure jobs in such a way that things will get done on their own, or efficiently by someone else.  The ultimate goal of systemising your business is so you have more time to concentrate on growing your business and to enjoy your life.

Systemising your business also has another major advantage to it.  When your business processes are organised and proven, there is a much smaller chance for errors.  Because interruptions or errors can be costly, both in terms of time and money, avoiding unnecessary slip-ups serves to improve the overall performance of your business. 

So how do you go about systemising your business? 

First, know that it doesn’t mean you have to re-invent the wheel on each procedure.  You just have to find out how each procedure is best accomplished, document it, and repeat it.  Here is how you should get started:

1.  Take a step back and look at the big picture.

2.  Identify the activities that always seem to go wrong, take up too much of your time, or create a lot of stress for you.

3.  Create diagrams for each activity which indicate:
•   the desired results
•   the workflow
•   accountable persons
•   appropriate timeframes
•   resources needed
•   measurable performance standards

4.  Think about how you can group tasks together and how you can delegate them.

Once you establish systems within your business, you’ll be so much more comfortable with how much better everything works.  You’ll have so much more time for steering the business, giving your customers the attention they need, and most importantly, to spend quality time with yourself and the people you love.

Stop playing Santa- you’re in the business to make money

Words like “corporate responsibility” and “business conscience” have become quite the buzz of late.  Many people think that businesses have become too selfish and that, in their pursuit for profits, they should also give something back to society.  Now that all sounds good if you’re Bill Gates or Sir Richard Branson and can afford that level of generosity.  But what if you’re a small business owner just starting out?  How far should, or can, you go when it comes to being generous?

Many small businesses make the mistake of giving too much.  So much, in fact, that it ends up negatively affecting their bottom line.  In order not to let that happen, you need to have a healthy balance between profitable activities and generosity.  Here are some key mistakes that many small businesses make on a regular basis:

Free information.  Yes, it is important to provide people with information about your company, especially if you’re just starting out.  Therefore, many small businesses regularly send out tons and tons of free brochures or information packages about the products and services they offer.  But does the amount of business brought in by them more than offset their costs?  Instead of sending these types of materials out randomly, it might be a better idea to selectively send them out to people who have specifically asked for such information.

Free samples.  Consumers love receiving freebies such as product samples.  But product samples don’t always convert consumers into customers.  Handing out product samples can become quite expensive if it is not done strategically.  Only make them available to your best prospects.

Donations.  Charities will come knocking on your door to ask for donations at one point or another.  A certain amount of donations to charity are always tax deductible.  But you are not Oxfam and you need to limit your donations to a few selected charities.  Learn to say no once in a while.

Employee perks.  In a small business, especially if it’s a family business, the culture of paternalism is very strong and employee loyalty is highly valued.  Therefore, when times are good, business owners often reward the employees that have stuck with them by giving them huge pay raises and bonuses.  But what happens when times get tough and such employee perks are no longer sustainable?  What if sustaining them means your profitability will be in the red?  When rewarding employees, make sure that you have the ability to sustain those rewards even when business is slow.

When charitable acts start to eat away at your profits, they become bad business practiceA.  Be prudent with your generosity if you are still trying to get your business off the ground.  If you go out of business, you won’t be in a position to help anyone at all. So stop playing Santa, and focus on the profitability and sustainability of your business.

Stick to the knitting - focus on your core business

Small business owners who are looking to grow their business are often tempted by the idea of diversifying into other products or services.  However, a countless number of business ventures fail utterly when their owners decided to diversify away from the core of the original business.  Expanding into other product lines or services takes a large amount of time, effort, and resources.  

When a business doesn’t have enough of these to handle the expansion, you end up with a situation where both the new and old ventures suffer.  This is particularly the case for newly-established small businesses that have very limited resources to begin with. In the early stages of your small business, it is vital that you stay focused on your core business and its true strengths.  

In order to make the most out of your limited resources, you need to identify what it is that your business does best and concentrate on it.  Related and unrelated endeavours will distract away from what your business does best.  Your business may be involved in many things, but there has to be something that it does better than anything else.  

The Coca Cola Company, for example, produces a myriad of different drinks, but its main product is undeniably Coke.  If the company were to stop selling Coke, it wouldn’t survive.  So how do you get clear about what your core business is?  

You can start by asking yourself these questions: 

1. If you were forced to eliminate all of your products and services, and could only keep the one that is most crucial to the survival of your business, which one would it be? 

2. Why would a customer do business with you instead of a competitor?  What does he get from you that he can’t get from your competitor or anyone else? 

3. What one product or service is so important to your business that you would be willing to lose some customers for it? 

4. If your best customer had to deliver a 30-second speech about your company, what would he tell his audience? 

Answering these questions will help you to define what your core business is.  When you concentrate on your core business, you maximise the value you deliver to your customers by satisfying a critical need.  You also build-up your reputation and you’re identified with providing a certain product or service.  

Your customers will be attracted to you because they know with certainty that you will deliver what they need.  This is the best way to become a leader in your market.  So stick to the knitting, and focus on your core business!

Broaden your marketing efforts

This is another important concept. If you currently run one radio commercial or use only your business cards to market your business, you’ll have limited the number of customers you can reach.

By broadening your marketing efforts in several directions, you’ll be able to reach more potential customers – and be able to convince them that they should be purchasing your product or service.

Mix your marketing efforts up. Don’t allow yourself to get stuck in a rut of simply sending out direct mail or advertising through an e-mail marketing campaign. Try something new.

Maybe you could send out a promotional item such as a pen once a month, and then follow up with a direct mailing that advertises a discount on your product or service the following week.

Keep things fresh.

People will see you as innovative – after all you’re always doing something new and they’ll never know what to expect next. This will give your business a reputation for professionalism and creativity, two important traits to customers.

Your clients don’t want to work with stuffy businessmen, but rather creative entrepreneurs who put thought into their customer’s needs and wants.

Marketing can take time to pay off.

However, you will notice that some efforts are more effective than others. Don’t waste your time and, more importantly your money, on marketing tools that clearly aren’t working. If your television commercial hasn’t brought in a single customer or made the phone ring, cancel the ad and book a radio spot instead.

Remember…You will have to experiment to find the best combination of marketing strategies and tools for your business.

Business ratio

Learn 3 simple business ratios to identify negative trends in your business in less time than it takes to read your favourite newspaper.

Business ratios are tools that help you in evaluating the current performance of your business.  They are also very effective in helping you detect problem areas within your business before they get out of hand.  Business ratios are mathematical relationships between different items in the financial statements.  They are quite simple to calculate and learn, but require that you have some basic knowledge about financial statements.  

Today we will discuss three different types of business ratios, although there many more types that are used in business analysis on a regular basis. 

Liquidity ratios.  These types of ratios measure the ability of a business in meeting its short-term obligations.  One major business ratio under this category is the current ratio, calculated as follows: 

Current ratio = Total Current Assets / Total Current Liabilities 

The higher the current ratio, the more capable the business is in meeting its short-term obligations.  A current ratio which is lower than 1 usually indicates that the business is not able to meet its short-term obligations when they fall due.  Although a low current ratio is not a sign of good financial health, it doesn’t necessarily translate into bankruptcy because there are many different ways that a company can secure short-term financing to meet its emergency needs. 

Leverage ratios. These types of ratios measure the degree to which a business is financed by debt.  One major business ratio under this category is the debt to equity ratio, calculated as follows: 

Debt to Equity ratio = Total Long-Term Debt / Owners’ Equity 

A high debt to equity ratio usually means that a business has aggressively financed its growth with debt.  The risk in this is that the interest costs of the debt will not be covered by the return that is generated by the growth. 

Activity ratios.  These types of ratios measure how effective the business is in using its resources.  One major business ratio under this category is the inventory turnover ratio, calculated as follows: 

Inventory Turnover ratio = Sales / Inventory 

The inventory turnover ratio for a specific operating period essentially shows how many times a business’s inventory is sold and replaced in that period. A low ratio is usually an indication of poor sales or excessive inventories. A high ratio usually indicates a high level of sales or insufficient inventories to meet customer demand. For more information on how to read financial statements, take a look at my article “Impress your bank manager! How to read your balance sheet”.