September 27, 2012

Weigh Yourself Every Day For Business Success

I like to eat.  I like to drink beer.

But I don’t want to get fat.  That’s why I weigh myself every day.

If I find I’ve gained a kilo it will be on my mind.  Then it’s easy to modify my behavior by skipping dessert or passing on that last beer.  A week or two later I’ve lost the extra weight.

If I don’t weigh myself every day it’s easy for the extra kilos to sneak up on me.  Losing 5 kilos is a lot harder than losing 1 kilo.

What is measured can be managed.  I’ve found it’s the same thing in business.

Identifying the right things to measure regularly is a small thing, but it can have a HUGE effect on your business results.  Measuring focuses attention.  Focused attention brings effective action.  Effective action brings results.

At my last job I was always annoyed by our high levels of accounts receivable (A/R).  A/R is not only a free loan to customers, but it represents unproductive working capital and lost cash.  I was convinced that the sales team could get the same or better sales results whilst making fewer sales on credit and speeding up collection times.

With the help of Hang our Superstar Business Analyst I created weekly reports showing total A/R and breaking it down by sales person and days outstanding.  We also calculated an umbrella metric called “average days sales outstanding” which was total A/R divided by the average daily sales figure — it expressed total A/R as the number of sales days locked up in A/R.

For example, an “average days sales outstanding” of 25 meant that 25 cumulative days of average sales revenue was locked up in A/R.  Almost a month of revenue in cash lent to customers on an interest-free basis!   Plus our sales girls often had to waste valuable time chasing customers to pay their debt.  Unacceptable.

I gave the reports to Mr. Trong, our Sales Director, and explained to him why A/R was bad for our business.  Then I challenged him to lower average days sales outstanding by 50%.  I sweetened the pot by adding a bonus incentive.  We reviewed the A/R numbers together each week in our 1+1 meeting.

A year later Mr. Trong and his team had lowered average days sales outstanding by over 70%.  It was a huge win, resulting in hundreds of thousands of dollars of freed cash and reduced working capital.  Regular measuring is what made it possible.

Are you weighing yourself every day?  What are the key metrics in your business?