Yesterday in my post, I was suggesting to you not to compare yourself with other network marketing businesses (or partners) but to compare your business over time. Comparing your business over time helps you to stay focussed (and not to get discouraged) when your business is not performing as great as you think or as great as others.
Today I will give you some more information about how to compare your business over time to evaluate your performance. I will focus on the financial aspect but know that there are more performance measures that can be used for your business.
As you are building and growing your business, you need to have a good picture to see if you are carefully managing your business and to ensure the success of any new investment plans or decisions. For any type of business (even for a single person network marketing business) you have to put some kind of performance measurement systems in place. This is an important way of keeping track on the progress of your business. It gives you vital information about what’s happening now and it also provides the starting point for a system of target-setting that will help you implement your strategies for growth.
The Importance of Setting up Measurements and Targets
Performance measurement and target-setting are important to the growth process. While many small businesses can run themselves quite comfortably without much formal measurement or target-setting, for growing businesses the control these processes offer can be indispensable.
The benefits of performance measurement
Knowing how the different areas of your business are performing is valuable information in its own right, but a good measurement system will also let you examine the triggers for any changes in performance. This puts you in a better position to manage your performance proactively.
I will focus on financial measures of performance, which are among the most widely used by network marketing businesses, but bear in mind that nonfinancial measures (e.g., human resources, customers, sectorial, etc.) can be just as important.
The benefits of target-setting
If you’ve identified the key areas that drive your business performance and found a way to measure them, then a natural next step is to start setting performance targets to give you a clear sense of what you are aiming for for your business.
How to Measure your Financial Performance
Getting on top of financial measures of your performance is an important part of running a growing business.
It will be much easier to invest and manage for growth if you understand how to drill into your management accounts to find out what’s working for your business and to identify possible opportunities for future expansion.
Measuring your profitability
Most growing businesses ultimately target increased profits, so it’s important to know how to measure profitability. The key standard measures are:
- Gross profit margin – this measures how much money is made after direct costs of sales have been taken into account, or the contribution as it is also known.
- Operating margin – the operating margin lies between the gross and net (see below) measures of profitability. Overheads are taken into account, but interest and tax payments are not. For this reason, it is also known as the EBIT (earnings before interest and taxes) margin.
- Net profit margin – this is a much narrower measure of profits, as it takes all costs into account, not just direct ones. So all overheads, as well as interest and tax payments, are included in the profit calculation.
- Return on capital employed (ROCE) – this calculates net profit as a percentage of the total capital employed in a business. This allows you to see how well the money invested in your business is performing compared to other investments you could make with it, like putting it in the bank.
Other key accounting ratios
There are a number of other commonly used accounting ratios that provide useful measures of business performance. These include:
- liquidity ratios, which tell you about your ability to meet your short-term financial obligations
- efficiency ratios, which tell you how well you are using your business assets
- financial leverage or gearing ratios, which tell you how sustainable your exposure to long-term debt is
Bear in mind that even though you are likely to use an increasing number of financial measures as your business grows, one of the most familiar – cash flow – remains of fundamental importance.
Cash flow can be a particular concern for growing businesses, as the process of expansion can burn up financial resources more quickly than profits are able to replace them.
How to Set Useful Targets for your Business
It is just a small step from measuring your performance to the much more dynamic process of driving up performance levels across your business. This involves setting performance targets in the key areas that drive your business performance.
Key performance indicators (KPIs), targets and business strategy
Performance targets are a powerful management tool that can help you deliver the kind of strategic changes that many growing businesses need to make. The top-level objectives of your strategic plan can be implemented through goals, and setting targets based on KPIs is an ideal way of doing this.
Setting SMART targets
It’s a familiar acronym, but a very useful one – your targets should be SMART – specific, measurable, achievable, realistic and time-bound:
- Using KPIs ensures your targets will meet the first two criteria, as all KPIs should, by definition, be specific and measurable.
- Achievable – you need to set ambitious targets that will motivate and inspire you, but if you set the bar too high you risk deflating and discouraging yourself instead. If you can, look back at your performance data for recent years to get a sense of what kind of performance boosts you’ve seen before – this will give you a sense of what is feasible.
- Realistic – setting realistic targets means being fair on you and your capacity to reach them. Make sure you only set performance improvements in areas that you can actually influence (i.e., areas under your control – time, money).
- Time-bound – your progress towards a goal will be more rapid if you have a clear sense of the deadlines against which you will assess your progress.
Hitting your targets is unlikely to be a cost-free process, so be ready to make the necessary resources available when needed. Also, undertake regular reviews to motivate yourself and to make changes if the progress made isn’t as expected.
I hope you enjoy that article as much as I did. Feel free to leave me your comments below.
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