PLANNING KPIS: WHERE SHOULD YOU FOCUS?
Every business starts with an idea. The greatest innovations exist in between two worlds that no one ever thought complemented each other. Of course, these are also the greatest risks but if accepted by the market has the greatest potential for growth.
This applies when the market risk is a customer risk rather than technology risk. You will no doubt succeed if you found a less invasive cure for cancer.
In the middle of the apps and taxis world is where Uber found existence. In this section, we talk about business growth from idea to maturity and suggest metrics to keep you focused in every stage of your business.
Business growth stages
Depending on where you are in your business growth, you will need to focus on different areas of your business. According to Harvard business review, a business passes through five stages as follows:
- Take off
- Resource maturity
In each of these phases the needs, focus and measurement should be based on the specific needs of the business as discussed below.
Stage 1- Existence
In the beginning, the internal environment is simple environment where owner does everything and is the business. Systems and formal planning are minimal and almost non-existent.
This is when the business is still struggling with getting customers and delivering products and services well enough to become a viable business. The strategy at this stage is to stay alive. The risk to close the business due to extreme stress is very high.
The key issues the business owner faces at this stage are:
- Expanding the customer base or production process
- Cash management
- Business Environment
The metrics you choose is what your business will focus on. So, if you are focused on the wrong things, not much will be accomplished. Example, being too focused on brand image, website design or business structure at this stage, add very little value to validating your business idea. If you are going to survive in the existence space, your focus should be growth.
An entrepreneur in this space needs to validate the need for his/her product or service and the ability to create a process to serve the customers satisfactorily. The goal here is customer acceptance at an affordable cost.
The following metrics will help a company in the existence space focus on the right thing:
- Customer feedback
- Number of mentions on social media
- Customer reach
- Monthly recurring revenue
- Customer retention rate
- Customer satisfaction
- Website traffic conversion
- Cash burn rate
The strategic process should be focused around the metrics that will help the business survive. Long complex exercises are useless at this phase. Keeping it simple is key to survival.
Stage 2 – Survival
At this point, the business has found a market fit for its products/ services. It is no longer struggling with getting customers and has a pretty dependable system of serving them. It might also have a few employees but the business is still controlled by the owner
Most stage 2 businesses lack sellable value. In other words, they close down without a financial freedom plan for the owner. The risks here include very low returns and the ease at which they can be wiped out by the competition. Large investments might be needed at this phase.
The key issues in stage 2 are:
- Margin management
- Sales and growth management
- Cash management
- Business Environment
The following metrics will help a business in the survival space focus on the right thing:
- Gross margin
- Contribution margin
- Net Profit margin
- After tax profit margin
- Accounts receivable turnover & Account receivable days/ Days sales outstanding
- Inventory days
- Accounts Payable Days
Planning processes should still be kept simple. A simple strategic plan and budget are needed to navigate growth. The businesses with the best chances of survival are those who plan.
Stage 3 – Success
At this stage, the business has begun to create its own identity apart from the owner. The owner has a choice to keep expanding or maintain the status quo. The business generates enough cash to finance the owner’s lifestyle even without direct involvement.
At this stage, the business owner suffers from the need to maintain the status quo rather than staying flexible with the external environment. What the owners needs to realize is what took him to stage 3, will not take him further. If the business does not stay innovative, external forces might wipe it out of business.
The business has excess cash and its very healthy. Functional managers are brought on board. The business begins to create a strategy with budgets. The owner becomes less involved as systems evolve. Most entrepreneurs are not rule followers which is why they run their business in the first place. This makes it easy for entrepreneurs to lose interest when the business gets formal.
The following metrics will help a business in the success space focus on the right thing:
- Total asset turnover
- Fixed asset turnover
- Asset to sales ratio
- Return on asset
- Return on investment
Stage 4 – Take off
No owner of any business can ever experience this level of growth if it has never learned to truly delegate. At this point, growth is totally out of the hands of the owner. The business becomes too big for the owner to manage every detail.
The owner must have a tolerance for learning from failure. If the owner has control issues, his actions will jeopardize the growth of the company. Competent managers are brought in as they need the ability to manage new growth. The business becomes decentralized, the systems are more refined and there are extensive strategic and budget planning sessions.
It is possible for the owner of a stage 4 company to be blindsided by his success as a stage 3 and cannot see his inability to run a stage 4 company. This could cause the owner to bankrupt the business. At this stage, the board of directors might involuntarily remove the owner before he bankrupts the business. Or, the business might be bought out by a competitor. The business might also move from having excessive cash to one that needs more cash.
The metrics for stage 1 to 4 businesses become important all over again. This is because the business will have to go back to the creative phase which will put it back in the phase 1. Hence forth, the cycle begins again.
Stage 5 – Resource maturity
At this stage the business is mature and faces the risk of losing the entrepreneurial spirit that grew it to that size. There is now a process for every action, a budget for every expense and a routine strategic session that has lost all meaning. The business has lost the flexibility of a small business.
The key issues are:
- How to be big but act small and entrepreneurial
- Eliminating the inefficiencies brought about by growth
- Bring meaning to the strategic and budgeting process
- Keeping sight of external environment changes
- Keeping pace with the external business environment
- Business as usual attitude
- Using excessive acquisition to support growth
To become sustainable, it is paramount that the company begins the cycle all over again.