Annual Plans:  KRIs and KPIs

Last week, I posted about initiatives.  This week I want to talk about measurements.  There are two kinds of measurements used in Plans. 

The first type of measurements are called Key Results Indicators (KRIs).  They measure the results of business activity.  An example of a KRI is Revenue.  Revenue is a result of Sales, which is a primary business activity of every for profit company.  It also is a very important number to the Income Statement and every company should be planning for and setting measurements for Revenue.  I know this seems very basic, but we need to include the impact of any Initiatives in these measurements.  When will the initiative become important?  Will I see benefit from the Initiative in this metric or other ones?

The second type of measurements are called Key Performance Indicators (KPIs).  These measure day to day work that should be driving results to some KRI.  An example of a KPI for Revenue might be the number of Sales Calls that are made.  If you want to drive higher Revenue, then one way to do it is to call on more prospects.  There should be some correlation between these numbers, but the Sales Calls will happen before the Revenue increase.  Depending on your Sales Cycle (the time between first contact and deal closing), you might have a good predictor of future Revenue.

And from that basic approach you can see the idea here.  KRIs are all about what happened in the past.  KPIs are all about what is going to happen in the future.  The goal of planning is to choose the right KPIs for your business and set the goals for them to meet or exceed your KRIs goals.  As you can imagine, this is an imperfect science and the first time you will likely get it wrong.  But it is the exercise of that connection in your business from your activity to your outcome that is important. 

Let me give you an example of a not KPI from my past and how it related to a KRI.  When we bought the former Reltec group in Dallas, their Product Manager showed us a chart.  This chart showed housing starts in some specific geographies to revenue from the company.  He could show a connection between the Revenue the group got with the housing starts from 6 months earlier.  The good news is that this connection was easy to track.  The problem was that the group had no control over it.  And that is what we want out of KPIs.  A level of control by our own actions.  So while this was a valuable tool, it was not a KPI in a business process way.

A better example would be a cost reduction plan that I worked on at AFC.  We stack ranked the products by volume and then took the top 10 to evaluate what could be cut out of the design or out of the manufacturing.  We set a dollar amount that we needed to save through this process and measured it quarterly.  Each group that had responsibility with the top 10 had a goal to deliver on.  That allowed us to track at a lower level how each team was doing.

So, that is a little about measurements and how they can be created to drive business results.

Have a great day! 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

Well, its earnings season and I am starting my posts with Calix.  I want more time with the 10-Q from Enphase but what I have to say about Calix is unequivocal.  Since reporting, the stock is up considerably.  This is due to the 4Q guidance, but what I have to say I think eclipses that.

Let's talk numbers first.  Revenue was $128M of which $106M was product.  The company with that lost $0.35 per share.  The guidance for Q4 was Revenue of between $140M - $145M and a loss of $0.10 - $0.15 per share.  The company lauded this set of results and predictions as substantially on track with their plan and how things should be.

I completely disagree.  If you look at the numbers, the Product Revenue was down year over year on a quarterly basis.  From my time in the industry, I know Q3 is a big quarter.  That represents a huge problem for me.  Secondarily, they have been increasing revenue year over year with services.  In this case, they are losing $6M on the services at Gross Margin.  This compares to essentially breakeven last year.  This means to get the business associated with these services that Calix had to give its customers a $6M discount.  Now, to complete this thought we need to come back to the R&D expenses.  Right now, if you ask Calix I am sure they would say they are spending about 25% of Revenue on R&D.  The reality is that this R&D has to do with product and not services.  That means that really that is more like 30%.  That is an extraordinarily high number for a company that is flat this year for Product Sales.  Add into that that they had to give a discount, you get real problems.  If you are building such great and valuable products with all of that R&D, why did you have to give your customers a discount?

Now the stock has done well post-announcement.  I see a completely different story than the one the company tried to sell.  The analysts were all over the service margin issue, but I don't believe that anybody tied it up in a bow for you like this.

My view is quite simple.  This is the third or fourth major growth initiative from Calix that has gone essentially nowhere.  That is a problem from not recognizing that strategic situation and dealing with it correctly.  To me that starts at the top and the Board of Directors should do something about it.  Yes, I think it is time for Carl Russo to go.  Look the company is substantial and not going away anytime soon.  But they clearly need a new path forward as the last several have not worked.  That is why you need a change of leadership.  They have turned over just about every other position in the leadership.  And yet the problem remains.  Now it is up to the Board to act.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Annual Plans: Initiatives

Last week, I posted about Budgets.  When you are done with your Budget, you might be unhappy with the bottom line results of it.  So, the question is "What do we do now?"  The answer is Change.  It could be some new product or service.  It could be a cost saving initiative.  The question is where to start and how to create these kinds of initiatives.

If you recall, a few (fire interrupted) weeks ago we talked about a SWOT.  That should help get the juices flowing.  Look at the Strengths and Opportunities and see if there is something that can be capitalized on by a new initiative.  Alternately, you can look at shoring up your Weaknesses and protecting from Threats.  A SWOT evaluation can be really effective when combined with a look at your Target Market and Ideal Customer.  Is there anything here that helps align the initiative from where you want your best customers are going to come from. 

The second thing you can do is look into your Financial Statements.  Is the bottom line enhanced better with a cost initiative or a revenue initiative.  I have some clients that have extraordinarily lean organizations. For them, it is much better to go after revenue.  They have cut costs to the bone, and it gets harder to cut over time.  Others might find that it is better to lower costs in a substantial way.  There are companies that provide standards for how companies look financially.  You can line up your finances against those standards and see where there is variance.  That makes a great way of comparing your company against comparable firms and seeing how you stand.

The final source is what is going on in the general market.  Internet and Information Technology is dramatically changing the way business is done.  How up to date is your firm?  What are the local and regional economic trends?  What are your local competitors doing?  Are there older businesses that might exit the market?  Have you heard about new market entrants?  What is your local business journal writing about?  All of these provide fertile grounds for thinking about something new.

The best thing is to have a moderate list of things that you can do and narrow it down to a smaller list of things you will do.  Depending on the size of the business and the size of the initiatives, there should be no more than 3 top level initiatives and for most small businesses 1 is probably a good number.  Better to do it really well than to half do many things.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

I want to close up my thoughts about the Fires that hit the North Bay before we move into Earnings Season.  BioMarin has already reported, and others will do so starting next week.  So, there will be plenty to talk about.

What I have noticed that the sense of shock has started to ease and people are getting back to their lives, even if they have changed.  Many companies have gotten a bit conservative through the rest of the year.  I expect things to loosen up next year as people begin to rebuild their homes and the money from that begins to flow through the community at large. 

But people will get nervous this time next year.  How do I know?  I lived in Florida for 15 years and lived in South Florida during Hurricane Andrew.  That was the last Class 5 Hurricane to hit the Mainland United States.  The incident and the events before and after are still clear in my mind.  I remember the anxiety before and during the storm.  I remember the sense of isolation.  Once a major Hurricane hits, you don't want to be out in it.  I remember the meeting with the Insurance Adjustor and getting our repairs done.  I recall the drives into the rubble that was Coral Gables and Homestead to check on property belonging to relatives.  We had 250,000 homeless overnight and the system was overwhelmed.

That experience made me appreciate how well organized the response was here once it got going.  The rebuild will take time.  It will take a lot more time than you will expect.  For South Florida, it took about 5 years.  So be patient with the rebuild.  There is a lot of information out there from both the city and the county.  Take advantage of that information.

Finally, my experience with being in a large natural disaster has taught me that this too shall pass.  Yes, there was loss.  But you will come out the other side stronger and better prepared. Don't assume this will be the last time you and your community are challenged.  This is the 3rd major natural disaster in my life.  I learned from all of them.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Annual Plans:  Budgets

I know this is one of the least favorite topic of many Business Owners.  Time to make the Annual Budget.  But the Budget is a tool for you to use.  It lets you know how much you plan to sell and how much you plan to spend.  That way you can measure your performance across the year and know how to adjust your business based on the difference between what you planned and what you have.

For many, trying to create a budget the first time can seem to be a daunting task.  This exercise is not a lot different than what I ask startup businesses when they will have a steady-state business.  Something that represents the normal.  The good news is that an existing business will already have a set of financials, even if they are only understood by the Accountant or Bookkeeper.

There will be 3 areas of primary interest:  Revenue, Cost of Goods Sold, and Operating Expenses.  Each of these areas will start with last year's results.  Then ask yourself, "What else has changed?"  For example, did you introduce a new product or service?  Did a new competitor enter the market?  Are Insurance Prices likely to rise?  The way to deal with this is to look at each of those 3 major line items and to break them down into smaller categories.  Then you can look at each category and see if there is any likely change year over year.  This can be captured and a new baseline budget can be created.

I want to note here that small changes add up to make a difference.  To significantly improve profitability, you don't need to sell twice as much.  You can look at some of your costs and see if you can reduce them.  Every dollar of reduced cost is a additional dollar of profit.  So, even modest cost reductions with good revenue growth can make a business very valuable.

With all of that if you are not sure where to start, contact a Business Coach like me.  They can help you understand how to create a Budget as part of your Annual Plan. 

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Annual Planning:  Restart

So, the last couple of weeks dealing with fire issues has derailed my series on Annual Plans.  I want to restart that at this point.  Given that time and the change that it has wrought on the North Bay, I think it is appropriate to restart this series by talking about a SWOT.  That is not a SWAT, but a SWOT.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.  It is a simple tool to define the strategic positioning of any company.  Think of a simple x-y chart - converted into 4 boxes. Along the x-axis the left is "Positive" and the right is "Negative".  The y-axis is divided into "Internal" at the top and "External at the bottom.  The bottom right box is Threats (Negative, External) as an example.

You then proceed to fill out as many things in each of the boxes as you can.  Most people have a pretty good handle on the Internal positives and negatives.  The External can be a much bigger challenge.  This requires you to think about the changes in the environment that your business operates in.  For example, I am now in the environment of the rebuild from the North Bay Fires.  This has both challenges and opportunities.  Many businesses have turned conservative so it will be harder to land new customers.  On the other hand, people need to rethink some of their businesses.  So, limited strategic planning services could be a hot ticket.  And that is just an example for me.

There is lots of material up on the web about SWOTs.  They are not new and are not a miracle.  The most important thing is honesty.  You have to be up front with yourself about strengths and weaknesses.  No person nor any business is perfect.  So evaluate your business.  Look outside your business and see what is going on.  That is the starting point in evaluating the change that you will need for next year.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!