Smart Metrics and Dumb Metrics

“We doubled our profit over this month last year!” When I visit a coaching client, that’s a pretty exciting opener. Of course I want to know how and why. Too often the answer is “Well, last year this month had three payrolls,” or “We had two more working days than last year.”

If you have to explain the circumstances of a measurement, it’s a dumb metric. “Manage what you measure” is a pointless axiom when the thing being measured isn’t consistent. If your results vary because of circumstances beyond your control, how can you manage them?

In my most recent book Hunting in a Farmer’s World, I discuss the problems created when we stick to a farming calendar created centuries ago. Few industries (other than agriculture) actually function according to a twelve month cycle, but most continue to measure their results that way.

In the hospitality industry, a thirteen month year makes far more sense. Business volume is higher on weekends, and having a consistent number of weekends (four) in each cycle simplifies comparisons. Other companies in manufacturing and distribution pay attention only to quarterly results, because 13 week periods are far more consistent than 19 to 22 day months, which vary depending only on when the first day falls.

In a cyclical industry, such as those related to capital goods, an even longer cycle makes sense. Comparing numbers over a rolling three or even five-year period permits better analysis of trends and market share.

Fractioned appleThe whole concept of Key Performance Indicators (KPIs) requires that you compare between like things. The availability of big data allows it to be easily confused with actionable information. If 12% of my customers purchase a side order of Brussels Sprouts, and 23% order a Tiramisu, what does that tell me? Nothing. If 12% order the sprouts and 40% want the French fries, I may have information on which to base my menu design.

Useful business ratios don’t begin with the numerator (how many, how much), but with the denominator (of what?). Profit dollars, number of orders and labor costs are pretty useless data by themselves for comparative purposes . Margin percentage, closings per lead, sales per day and output per hour are critical management information.

If you are still reviewing your monthly P&L by mentally adjusting each month’s variables, you are wasting precious time. A twelve month cycle is required by the IRS, but that doesn’t mean you need to run your business by it. Choose ratios and periods that allow real comparison. Only those are smart metrics.

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One Response to Smart Metrics and Dumb Metrics

  1. >>A twelve month cycle is required by the IRS, but that doesn’t mean you need to run your business by it.<<

    While technically correct, IRS does allow 52/53 week years, which includes 13 – 4 week months!

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