Measuring the Success of Business Plans

 

© Can Stock Photo / dizanna

By Jim Hingst 

After you put your business strategy into action, you need to measure your progress to see if your employees are working the plan and if the plan is working.

 

Business metrics, also called Key Performance Indicators (KPI), provide your shop with way to measure and record actual performance against company goals. The most important goals are those that ultimately impact your bottom line, such as sales revenue, profit margin, sales expenses, scrap rate, qualified sales leads, website traffic or social media followers. You can group these goals in fundamental categories, which describe the principal activities of a shop: sales & marketing, financial and production.

 

Your KPIs should define the critical activities necessary to achieve your business goals; the metrics or yardsticks used to measure performance for a specified time; and the target value compared to a previous performance value. The importance of the KPIs is that it provides you with a picture of how well your shop is doing in achieving your goals.

In reporting the progress that you are making on your plan, you should run reports on either a weekly or monthly basis, when appropriate.

In managing a marketing program, we ran weekly reports. In working with young salespeople, you can use the reports as a starting point to coach them. The report and coaching sessions can also provide you with all the information you need to generate a rolling sales forecast.

 

Sales & Marketing Measurables

 

© Can Stock Photo / dizanna

  

Measuring your outcomes against your business goals is critical to improving performance. In sales you can use last year’s numbers as your benchmark to gauge performance.

 

In measuring your telemarketing activities, you could record the number of new prospects added to your database. You could also track the number of prospecting phone calls that you and your employees are making in a week. For each activity, you need to establish a goal for that activity, such as 30 new entries per week to the database or 50 prospecting calls per week.

 

You should have some means for capturing the data from the activities. Sales and marketing activities are easy to record if you use some type of automated Customer Relations Management (CRM) program, such as Salesforce.

 

You may not have the time to do a deep dive on every activity within your business. Nevertheless, you should keep in mind Tom Peters’ business maxim. “What gets measured, gets done.” Here are some activities that you should consider measuring:

 

• Revenue Growth. While nothing is more important for your business than profit, you will never grow your profits without growing revenue (another name for your company’s sales). That’s why tracking monthly sales and comparing actual performance to your sales budget is so important.

 

Failure to meet your numbers can alert you to problems within your business or with the economy, which should trigger a corrective response.

 

• Keeping your sales funnel full is critical in generating new business. That’s why you should record the number of prospects added to your database along with the number of qualified leads generated each week for sales. This should be easy to track if you utilize a CRM program.

 

• You should monitor the time it takes for sales to respond to leads and qualify the opportunities. Too many sales opportunities are lost simply because they slip between the cracks. This is a job for a sales manager. If you don’t have one, you can assign this responsibility to an inside person doing your marketing.

 

• One way to measure the effectiveness of your sales people and the quality of the leads provided is to compute the number of sales closed compared to leads supplied.

 

• Each month you should measure your sales cost (salaries, benefits, travel and entertainment expense and commissions). Determining your expenses to keep sales people on the road is critical in calculating Customer Acquisition Cost and your Sales Cost Ratio.

Example:

Sales Cost
Expense	Month	Year
Salary and commissions	$6250	$75,000
Benefits	$3000	$36,000
Travel & Entertainment	$2083	$12,000
Total	$11,333	$136,000

 

  

• To calculate your Sales Cost Ratio, divide the monthly sales cost by the monthly profit generated. The Sales Cost Ratio exposes whether your salesperson produces sufficient profit to justify what you are paying him or her. If your sales expenses are out of balance with profits, you need to either generate more revenue, cut costs or charge more for your products and services.

 

Example:

$11,333 (monthly sales cost)/$12,500 monthly profit = .91

 

• Customer Acquisition Cost represents all of your sales costs and marketing expenditures divided by the number of new customers that you acquire for a specified period. Sales and marketing expenses include your sales costs along with advertising expenditures, salaries of marketers and any overhead associated with sales and marketing. The Customer Acquisition Cost is important because it reveals whether you are producing a sufficient return on your sales and marketing investment.

 

Example:

$15,000 monthly sales & marketing expenditures / 25 new customers = $600

 

• Contract Value is a key factor in creating a rolling forecast. Whenever a salesperson qualifies a lead, they should assess the value of the opportunities as well as when the sale is likely to occur. This is information which the salesperson should enter into your CRM program. They should also input this into your rolling forecast along with the probability of making the sale.

 

• Win Rate. To evaluate the performance of your salespeople you can calculate their Win Rate which measures success in closing sales as a percentage. In computing their Win Rate, you divide the number of sales won or closed by the total number of sales opportunities that are either won or lost. You can use this rate as an indication of a salesperson’s probability of success. This number is useful in creating a rolling forecast.

 

Example:

25 sales won/58 sales won and lost = 43%

 

 

Using a CRM Program

Customer Relations Management Software (CRM) is essential in measuring your shop’s sales and marketing activities and easily generating reports.

Subscribing to a CRM program allows you to capture detailed customer and prospect history from your sales and marketing activities. This information is critical in analyzing customer needs and market trends.

 

What’s more, a CRM program provides you with a database of your customer base and sales prospects, which you can use when you initiate email blasts; direct mail marketing packages; conduct telemarketing campaigns.

 

In creating account profiles, CRM system can help in recording key contacts, information on competitors, problems with their current graphics program, history of past purchases and new sales opportunities.

 

A CRM system is only as good as the information entered. As the saying goes, garbage in, garbage out. For a CRM system to work in your operation, your marketing and sales people must be committed to input accurate and detailed data. You also need to take the time to analyze the information that the program provides in monitoring sales and marketing performance and to make changes to your business plans when needed.

Financial Measurables

 © Can Stock Photo / everythingpossible

 Some of the most effective and easily accessible KPIs are captured in your financial reports, which include your Cash Flow Statement and Income Statement, also called a Profit & Loss Statement or P&L.

 

These financial reports provide a snapshot of your business’ past performance that you can use to plan for and predict the future as well as to track or monitor progress toward your goal.  

 

• A Cash Flow Statement provides a snapshot of how well your shop manages the cash coming in and going out of your business.

 

• Generated monthly or quarterly, your Income Statement can provide you with a snapshot of your shop’s primary operations. Careful reading of your income statement can help you run your business. Some of the primary measurables that the income statement includes are: 

• Revenue (Sales)

• Cost of Goods Sold (COGS)

• Gross Margin

• Shop and Administrative Expense

• Profit

 

The basic format for an Income Statement is: Revenue – (Cost of Goods Sold + Shop and Administrative Expense) = Profit.

 

Cost of Goods Sold are your direct expenses incurred in production of your products. This includes direct material, direct labor and other direct expenses. My story on job costing explains what constitutes direct costs.

Shop and Administrative Expenses are your Overhead. Tracking these expenses is essential to accurately calculate your burdened shop rate. For most shops, these expenses are fixed.

 

In other words, if there aren’t significant changes to your business, shop and administrative expense should be relatively the same from one month to the next. Any major change in these expenses, should alert managers to a problem.

 

On the other hand, if your shop is growing rapidly, you need to regularly monitor expenses, because they will likely grow too. You need to account for any changes, because these costs affect your hourly shop rate. Below are some of the expenses that fall into this category:

 

Shop and Administrative Expenses

• Salaries and benefits (does not include raw labor charged to jobs)

• Rent

• Office Supplies

• Gas and Electric

• Phone Expense

• Vehicle Expense

• Travel and Entertainment Expense

• Insurance

• Marketing Expenses

• Legal Costs

• Accounting Services

In an effort to reduce expenses, you should create an expense budget divided between fixed and variable costs. While you may not have control over fixed expenses (rent, salaries, interest), you can control your variable expenses, which include advertising, travel and entertainment. A budget provides a picture of what you intend to spend, and compared to actual expenditures. It also gives you a way to compare current costs to last year’s expenses.

  

Gross Profit Margin. You can calculate gross profit from the information on your income statement. Expressed as a percentage, you compute gross profit by subtracting cost of goods sold (COGS)or direct costs from your revenue. That amount is then divided by revenue multiplied by 100%.

 

Gross profit represents how much money is left from a sale after you deduct your direct costs (raw materials, direct labor and other direct). It does not, however, include your overhead (shop and administrative costs).

 

Each business is different. A large screen printer may have an objective of operating at a gross profit margin of 60%. By comparison, a small sign shop could have a goal of selling at a 75% gross profit, which represents keeping direct costs at 25%.

 

Gross margin is also important because it indicates how much money you have left to pay for your overhead expenses as well as how much you will need to sell to break even.  What’s more, after you reach your breakeven point, you can predict how much profit you will earn.  

 

For example, if your monthly overhead expenses are $21,250 and you price your products at a 75% margin, you need $28,333.34 in monthly sales to break even. Sales greater than your break even point less direct expenses is gross profit.

 

Example:

Sales x .75 = $21,250

 

Sales = $21,250/.75

 

Break Even Point = $28,333.34

 

Profit. The ultimate measure of business success is profit. At the end of the year, if you have more money than you started with at the beginning, you are more or less successful. If you have less money, you need to make some changes in your business. Usually, corrective actions include generating more revenue, reducing costs or increasing selling prices.

 

Production Measurables

 

© Can Stock Photo / dizanna

You can rate the productivity of your shop in a number of different ways. These include comparing the actual labor hours charged to jobs to the total number of manhours available. If you are either a screen printer or digital printer, you can compute the number of hours a printer is in operation compared to the total number of hours available. For digital printing, you can measure actual throughput in square feet on a press versus its machine capacity. How you measure the efficiency of your shop is relative to your written goals. Read Setting Goals for Your Business.

 

One of the best ways to determine shop performance is to compare the actual raw material and raw labor charge to your jobs with these direct costs in your estimate. If actual labor and material exceeded the estimate, a manager needs to ascertain if the variance resulted from errors in costing or problems in manufacturing. In estimating, a corrective action may be adjusting unrealistic standards. An investigation of production could reveal problems in planning, wasteful practices or job performance. Read Job Costing for Sign Shops and Printers.

Other ways to gauge production performance include tracking cycle time, changeover time and scrap.

 

• CycleTime measures the time to manufacture a finished product from the order date to the date of delivery. This key performance indicator reveals how efficiently your shop produces jobs. It should also set off an alarm, if you have problems in your manufacturing process.

 

• In a job shop such as a screen printer, changeover time is extremely important. It measures the time it takes to clean up a press at the end of production through setup of a new job.

 

Scrap. In a job shop such as a sign company you can measure scrap by tracking actual raw materials used versus your estimate. Any variance in the numbers will indicate a fault in costing or it can reveal problems in production. Possible production problems could include poor production planning, or rejected graphics that did not meet your quality standards.

 

Returns and Allowances. Your income statement also should have a line item for Returns and Allowances. Returns are the defective or unacceptable products for which dissatisfied customers want refunds. In many cases, this represents the added cost for rework. Allowances can also take the form of discounts to unhappy clients as compensation for lower quality work.

 

You can use Returns and Allowances as a metric to gauge the quality of work that your shop produces. It is valuable because it directly affects your bottom line. This is money lost for defective work.

 

Capacity Utilization. As sign shop equipment, such as digital printers and plotters, have become more expensive, monitoring machine capacity utilization has become increasingly important. Failure to maximize machine capacity adds to your cost of producing products. It may also reveal problems in production or other areas of your business.

 

You can track unused machine capacity in a couple of ways. The first is to record the actual number of hours in operation versus the total number of hours possible in production capacity. For example, if a press is running 100 hours (an average of 5 hours a day times 20 work days in a month) during a month out of possible 160 hours (8 hours a day for 20 work days in a month), the unused machine capacity is 60 hours or 37 ½%. 

Productivity. One way to gauge your productivity rate is to use labor tickets to record labor hours for each job. This allows you to calculate the ratio of actual hours charged to a job compared to hours spent on non-production activities.  Tracking actual hours in production against your estimates also allows you to adjust your estimating standards or to alert you to problems in production.

Measuring your KPIs in production can help you recognize and examine problems in your manufacturing system. Correcting issues related to personnel, machinery and procedures will aid your efforts in making incremental improvements in your workflow and the quality of your products.

 

Communicating the production KPIs with your associates makes them aware of any needed changes in process, job performance, technology or training. It can also draw attention to any investments that you need to make in equipment, maintenance or additional skilled personnel.

 

In measuring the performance of your production process, select those factors that most directly have an impact on your goals. Since you most likely do not have time to measure everything, select those KPIs that are easily quantifiable along with those factors that your workers are capable of controlling.

Conclusion.

"When it is obvious that the goal cannot be reached, don't change the goal, adjust the action steps."  Confucius 

The importance of measuring your results, once you execute your plan, is that your outcomes tell you whether your plan is working. That way, you can modify your plans and activities or make other adjustments within your organization. 

  

You should never feel any shame if you need to make changes to your plans as you travel toward the end of your journey. You have probably have heard the metaphor of airline pilots flying toward their destination. For most of the trip, the plane veers off track for any number of reasons and the pilots must continually make course corrections.

 

That’s why, in your role as a manager, you need to constantly measure the results of your activities. If you fail to meet deadlines or produce desired outcomes, you need to modify your goals or adjust your plans.

 

In fact, you should expect the unexpected to happen. It is not if you will face obstacles to get in the way of achieving your plans, it is when. In the words of the famous German Field Marshal Helmuth von Moltke: “No plan survives contact with the enemy”.

 

When faced with the inevitable adversities of business life, an unofficial slogan of the Marines provides guidance: “improvise, adapt and overcome”.

 

 

Remember that the 5 steps in a successful business strategy include:

 

1. Setting Goals for Your Business

2. Developing a Plan

3. Executing Your Business Plans

4. Measuring Your Outcomes

5. Modifying Your Plan

About Jim Hingst: Sign business authority on vehicle wraps, vinyl graphics, screen printing, marketing, sales, gold leaf, woodcarving and painting. 

After fourteen years as Business Development Manager at RTape, Jim Hingst retired. He was involved in many facets of the company’s business, including marketing, sales, product development and technical service.

Hingst began his career 42 years ago in the graphic arts field creating and producing advertising and promotional materials for a large test equipment manufacturer.  Working for offset printers, large format screen printers, vinyl film manufacturers, and application tape companies, his experience included estimating, production planning, purchasing and production art, as well as sales and marketing. In his capacity as a salesman, Hingst was recognized with numerous sales achievement awards.

Drawing on his experience in production and as graphics installation subcontractor, Hingst provided the industry with practical advice, publishing more than 190 articles for  publications, such as  Signs Canada, SignCraft,  Signs of the Times, Screen Printing, Sign and Digital Graphics and  Sign Builder Illustrated. He also posted more than 500 stories on his blog (hingstssignpost.blogspot.com). In 2007 Hingst’s book, Vinyl Sign Techniques, was published.  Vinyl Sign Techniques is available at sign supply distributors and at Amazon. 

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