Have you ever though back about that *one* missed opportunity?
That opportunity you didn't get because you weren't prepared?
Today I talk about key results drivers in your business.
How to identify them. How to set up a tracking mechanism. And how not to miss that opportunity again.
But first, our sponsor.
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Business results are driven by a few key moments-Don't miss them
This is republished from December 2023 with modifications. I’m on a trip this week, so I decided to take some time off. While a republish, I thought it was still an important topic… and my Draymond Green bit is one of my favorites.
I hope you enjoy.
December 12, 2023, Draymond Green of the Golden State Warriors flailed his arms and hit Jusuf Nurkić. The next day it was announced he was suspended from the NBA indefinitely.
On it’s face, without additional context, it appears like a drastic measure for a “sorta” punch thrown by Draymond. But when you zoom out, 4 weeks prior he put Rudy Gobert in a chokehold and has a long history of cheap shots. It was a pattern the NBA decided they could no longer ignore.
Outside of the cheap shots, Draymond has had a great career. He just signed a $100 million contract and has made in over $150 million in contract value alone.
In 12 seasons in the NBA, he has averaged almost 30 minutes a game, 8.7 points, 6.9 rebounds, and 5.6 assists on the way to the Warriors winning 4 championships.
He has been a key cog in their success and benefited with 4 NBA All-Star selections, won 2 Olympic gold medals, and was named Defensive Player of the Year in 2017.
Despite all the positives a handful of moments where he couldn’t control his temper are most likely what he’ll be remembered for.
The greatest players in basketball are remembered by their championships and clutch moments.
It’s a harsh reality and something you have to imagine can haunt the best.
As I thought of this in relation to Draymond… I came to a realization: business is no different.
While every decision you make has an impact on your outcomes, results are driven by a few variables with an outsized impact.
Warren Buffett famously said he only has to make one good decision every five years to be successful.
Our satisfactory results have been the products of about a dozen truly good decisions. That would be about one every five years. - Warren Buffett
But to find those gems and ultimately make the good decisions, you have to put in the consistent work.
So what does this mean for your business?
First, we want to identify what those few overly impactful things are. What are the key drivers in your business?
Once we’ve identified those, we need to identify the right KPIs to track progress in those drivers.
Let’s dive in.
Identify result drivers
Each driver will have some impact on the business, so despite there being a few with an outsized impact, we need to understand them all. From understanding them all, you’ll be able to identify which you need to track more closely and frequently.
Drivers can be broken into two categories:
- Revenue & Profit Drivers
- Cash Flow Drivers
Within each driver, there are many different levers you can pull. We don’t have the time to go through all those today, but we will in the near future (I’ll be putting together a series).
But as a primer for today, let’s quickly summarize.
Revenue & Profit Drivers:
- Product: a good product separates you from competition and drives customer engagement with your business.
- Pricing Strategy: the right price determines your position in the market and relationship with the customer. Aligning product and price is key.
- Revenue Growth: this is driven by your ability to source and market your product/service.
- COGS Optimization: if your COGS limits your ability to price where you should be in the market, your business is setup to fail. Sourcing and product/service structure are the big drivers here.
- Operational Efficiency: is your business ancient and missing ways to capture more profit?
- Customer Acquisition Cost: your ability to get customers for less than the cost of first purchase (or second purchase) can make or break the whole business. Understanding LTV (customer lifetime value) tells you at what point you’ll start to generate real cash.
- Customer Retention: while acquisition is important, good retention makes acquisition less so. Good retention increases LTV and means you have to reach less people to grow. If people are walking out the back door at a higher rate than they’re coming in the front, you’re fighting a losing battle.
- Leverage: too high a debt or capital expenditure load can make a solid business unprofitable.
Cash Flow Drivers:
- Inventory Management: inventory is one of the biggest drags on cash, as growing businesses constantly need to reinvest cash to increase inventory. Good inventory management can transform a business.
- Cash Conversion Cycle: CCC measures the time between paying for inventory to receiving money from your customer and your whole business runs on this metric. The ability to manipulate payment terms of your vendors and customers can transform your ability to keep cash.
- Capital Expenditures: equipment breaks down and work stops… exactly what you don’t want. Capital expenses are inconsistent, which means if you don’t plan for them it can damage the business.
- Borrowing Capacity: adding borrowing capacity can give you breathing room and allow you to ramp up. No borrowing capacity can mean you have to say no to growth.
- Debt Service: debt management is a specialty into itself. Understanding your debt structure and covenants is important to create a stable business.
Leading vs lagging metrics
Once you’ve identified the key drivers in your business, it’s time to figure out the metrics you need to track those metrics.
I go deep on this metric identification process in this article, so I won’t go deep on it here.
But a quick overview:
Start by brainstorming all the metrics related to the drivers you’ve identified.
Then, start narrowing the list.
Ask:
- What outcome are we trying to achieve?
- Which has the most direct impact on the outcome?
We ultimately come to 2-4 metrics to track one outcome. Those metrics should be split between leading and lagging measures.
Lagging metrics are the ultimate outcome you want.
Leading measures are predictive of the lagging metrics.
With leading, you want to get as close as possible to the first action of the chain.
Sales calls will predict revenue growth.
Equipment maintenance predicts downtime.
Training budget predicts higher sales call conversion rate.
Collection/aging reports predict cash conversion cycle reduction.
While the connections may be slightly different in your business, the key here is to capture the full cycle.
The right systems to track these metrics are also key.
Sometimes there can be manual capture, but it’s best to integrate this tracking into software you’re using.
Software like NetSuite allows you to capture a wide variety of metrics and automatically track them with ease.
Thanks NetSuite for sponsoring this issue.
NetSuite is the #1 Cloud ERP that gives you complete visibility and control over your business operations, including financials, inventory, HR, CRM and more. Over 37,000 organizations have turned to NetSuite to help grow their top and bottom lines.
Click here to see what the future holds for AI and Machine Learning in finance.
A system for review
Once you’ve identified your key drivers and metrics, it’s time to set up a system to review them.
Without consistent reviews, they’ll drop off the radar and not drive the results you want.
I go deeper into this here, but will give you the short version today.
Think about your business and consider: at what frequency do I need data surfaced to me?
I like to setup a weekly, monthly, and annual reporting schedule. Some businesses may need daily and/or quarterly reporting as well.
Do what works for you and your business rhythms.
Leading metrics will show up on daily and weekly cadences with monthly, quarterly, and annual using lagging metrics.
The goal is to have what I like to call “connected KPIs.” The leading should be predictive of the lagging.
So ask: what is the ultimate goal? These should appear on your lagging reports.
Then ask: what leading measures best predict the ultimate outcome we desire? These should go on your leading reports.
This will get you started creating an executive “dashboard,” but is the foundation of creating this structure within your whole business.
