Using the right metrics can help drive profitability. But what metrics do we choose to get us where we really want to go? Financial measures are not enough; you need other measures to truly determine the health of an organization.
While you do not see many companies using activity-based costing very often, for example, it can be very beneficial. This approach incorporates the cost of activities as opposed to the cost to deliver a certain product to your customer. Another strategy method used by corporations today is called the “balanced scorecard,” which uses a measurement system developed in the early 1990s used to determine costs that comes into play with more long-term planning.
Understanding each segment we do business in can help us be more efficient in terms of the costs in that particular area. How do we determine value for our customers? From the operations side, we look at the process.
In speaking today at NJCPA's 2018 Annual Convention & Expo, I noted the following steps should be utilized when considering performance metrics:
- Determine metrics for all four balanced score card operations perspectives which lead to accomplishing the organization’s goals.
- Determine one or two metrics that will define your organization’s overall success.
- Develop output measurements for each major company activity.
- Benchmark metrics against other companies.
- Include output measurements and dollars per unit in all financial responsibility reports.
- Manage to the metrics. You can move toward that benchmark. Remember that benchmarks have not politics in them, which is their greatest advantage.
- Choose metrics that match and support the execution and your strategy
When looking at metrics, they have to make sense in relation to all of the employees and the corporation’s goals and objectives. Management needs to ask themselves “are the targets truly achievable or are they someone’s pipe dreams?”