Journey of a Serial Entrepreneur

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How to get from where you are to where you want to be

5 Reasons why Teams Fail

“You will find men who want to be carried on the shoulders of others, who think that the world owes them a living. They don’t seem to see that we must all lift together and pull together.” Henry Ford

I started this series with a question posed by a reader  asking  why some teams succeed and others don’t. When I began structuring my thoughts and getting advice from more experienced entrepreneurs, the same issues kept coming up in one form or other. The core message behind all of them was the same, to get the team to work right, certain factors need to be in place along with hardwork and persistence. We have all been in teams where team cohesion is problematic, it is always an extremely frustrating experience. Hence first off, selection of team members/partners is an extremely important aspect, one that needs to be given a great deal of attention. Call it co-incidence, my post on 8 characteristics of an ideal business partner is the most visited post on this blog. However, even after you have reviewed your prospect partners using the 8 step process, there is still a likelihood of things not working out. Listed below are 5 things to look out for to measure the health of your team:

1. Mismanagement of Competing Interests: When a team comprises of many ‘star’ performers they are bound to have multiple offers on the table. When these offers begin to interfere with their performance and their  commitment to the project at hand, problems begin to arise. If these are left unmanaged they will slowly set seeds of mistrust and suspicion in other team members, this has a destabilizing impact on the entire team. It is important that these competing interests are brought to the table and are not used to leverage a team member’s position or interfere with their commitment. To read more about managing competing interests please click here.

2. Lack of Candor: The ability to communicate effectively is one of the core reasons why some teams succeed and others do not. When a team is unable to communicate their thoughts, suggestions or feedback openly, tensions arise. Being candid is every team members responsibility to themselves and to the rest of the team. This is not always the easiest path to take and many a time one will need to step out of their comfort zone to say it as it is. However when all is said and done, it is the things which are left unsaid that destroy a team from within. Set up systems where everyone is given the opportunity to speak freely and easily. To learn more about the importance of candor please click here.

3. Lack of Trust: In any relationship trust is a must, without it there is no team. In my opinion there are degrees of trust which need to be developed within a team. Expecting your team members to have 100% trust in you and your abilities from the get go is wishful thinking. Trust needs to be earned. The ability to trust someone depends on their shared core values, self confidence and risk tolerance. Mismatches in these components will result in a slow build up of trust. Low trust teams are very fragile and the slightest of hiccups can have severe ramifications. To learn more on how to build trust please click here.

4. Lack of Accountability: When team members talk more than they actually do, problems are bound to arise. Without clear objectives on what each team member is responsible for a culture for execution cannot be formed. Without such a culture certain team members may ride on the coat tails of others just to get by. Every team member must be held accountable for what he/she has been given responsibility. Inability to meet commitments, needs to be reviewed and appropriate action taken. To learn more on the importance of accountability and how to create it please click here.

5. Consistent Poor Results: If a team is consistently unable to reach targets and goals, the team and entire business model needs to be looked into. Many teams linger on even when results are clearly not being produced. This puts an enormous strain on the team and eventually leads to unpleasant defections and confrontations. This issue must be dealt with as soon as possible and strategies and tactics revised. If the team is unable to produce the results it needs, it is best to figure out how and where the team should  go from there. To learn more about how to deal with consistent poor results please click here.

The points listed above are I believe leading factors why some teams fail. One of the factors that I have not included in this series is a lack of good leadership. This is an issue that I think needs to be tackled in a separate series. Also, unlike the problems listed above this issue does not have any easy answer which says follow steps 1, 2 and 3 to help overcome the issue. Good leadership is a rare commodity. It all goes back to team selection and who is chosen to be the leader. If there is a problem at the initial selection stage then the team has a lot more to be worried about. The issues highlighted in this post are in the context where even though the team and team leader were correctly selected, the team still fails. I hope to get your comments and feedback on this series.

Related Posts:

8 Characteristics of Ideal Business Partners

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Consistent Poor Results

“Waiting is a trap. There will always be reasons to wait. The truth is, there are only two things in life, reasons and results, and reasons simply don’t count.” Dr. Robert Anthony

During the course of the week I have spoken about some key factors which lead to high performance teams failing. As a culmination of all the factors mentioned in my prior posts, the inability to reach targeted bottom line results, is a leading cause why such teams fail. I was advising a young startup team a few years ago, it was full of stars. They had a fantastic business plan and worked really well together. However the business was not gaining the traction they had projected. This was causing much tension within the team. This is a time when internal conflicts begin to surface. Initially no one really talked about it, rather they hoped that things would change. Unfortunately the market they were targeting was not ready for the product they had and soon the defections started to take place. This is a story one has seen many a time in small startups, as well as large companies.

It is only natural that when things are not going well that team members begin to explore other alternatives open to them. They are justifiably looking out for themselves and being realistic about the situation. However, if the business had created a culture of accountability and candor, I believe things may have gone very differently. Firstly, when things were obviously not working, how to tweak the business model would have been brought up and discussed candidly. Secondly, with greater transparency in the team, those individuals who were not contributing or whose skills were not required, could have started exploring other opportunities without suddenly leaving the team. Lastly, if the team did work well together there could have been other opportunities which they could have pursued.

Consistent poor results are definitely a major reason why teams and businesses fail. The key word is ‘consistent’. Losses are bound to occur at some point or other in a business. However, it is when they continue to appear without any direct action being taken, that it gets serious. As a team leader one needs to continuously keep a keen eye on key metrics and regularly update members about results and problems being faced. Transparency helps leave doors open for candid discussions and gives  team members the opportunity to make graceful exits. Warren Buffet has some wise words on this matter “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

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Lack of Accountability

Accountability breeds response-ability.” Stephen R. Covey

Starting a new business is a lot of fun. The first couple of months everyone is really enthusiastic. People are making sales calls, improving the website content, developing new marketing concepts and generally being highly productive. After the initial couple of months or even a year, there is a dip. The spark of starting this new revolutionary business begins to wear thin (unless you started something like Google). All of a sudden those sales calls are not being made and there is just not enough attention being given to the key first customers which you closed. I have experienced this in the first couple of ventures I was a part of. Whenever a routine set in, the enthusiasm levels began to drop. This then brings us to the next factor that results in the falling out of teams…a lack of accountability.

From the very onset of a business venture, clear objectives and targets need to be set for every team member. They need to be accountable for a specific component of the business. The progress on this must be reviewed periodically. I believe it is usually a lack of clear objectives that brings about a lack of accountability within teams. This is the leader’s or senior management’s fault. It is a reflection of poor leadership skills and is often taken advantage of by individuals riding on the coat tails of the effort of others. I have been  part of many teams whether it be at school or in a business, when someone or other on the team takes advantage of the free rider problem and ends up taking undue credit for the success of the team.

The components  talked about in my recent posts, such as lack of candor and trust, usually lead to this lack of accountability. When there are no clear objectives communicated to team members, and this is compounded by a lack of trust between team members, there is very little motivation to work  hard. Neglecting this aspect of a business will result in inadequate traction and eventually lead to a poor bottom line results. I will talk about that in the final post of this series. In conclusion, make sure that everyone in the team is held accountable to certain SMART goals and targets. This is essential to meet positive bottom line results and eventually succeed as a team.

Related Posts:

Execution of Corporate Strategy

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5 Key Financial Business Metrics

“If you don’t measure something, you can’t change it. The process of leadership is one of painting a vision, then saying how you’re going to get there, and then measuring whether you’re actually getting there. Otherwise, you risk only talking about great things but not accomplishing them.” Mitt Romney

As business owners we have to have our ears to the ground constantly to gauge how the business is performing. With the number of things happening in parallel, keeping up to speed is often a juggling act.  The financial management of business is a critical aspect of the overall functioning of the enterprise. Mismanagement in this area can have detrimental ramifications, these can essentially put you out of business. Keeping track of financial activity on a periodic basis is a necessity. To make the process of review easier, specially when one is running multiple businesses or business units, is to use metrics to get an overall perspective. Outlined below are five key financial metrics I use to assess the health of a business.

1. Net Cash Flow: This is by far one of the most important metrics, and one has to continuously keep an eye on it. Net cash flow is simply calculated by subtracting cash inflows with outflows. Alternatively, it can also be calculated by adding depreciation and other non cash expenses to net profit. Without adequate liquidity a business is often unable to reach its potential and will suffer severe growth issues. Use this metric to monitor the liquidity health of your business and analyze trends in areas beginning to run low on reserves. To learn more about how to calculate and use the net cash flow metric please click here.

2. Turnover Growth: Evaluating and estimating revenue growth is a tricky and challenging process. It is often based on assumptions and does not take into account unexpected events and scenarios. It requires us to take into account industry growth averages and our share of the market and industry pricing strategies, and then come up with a reliable metric. However from an historical perspective this metric can provide a reliable indicator to judge the performance of the business and the sort of average growth figures to expect. To learn more about how to calculate and use the turnover growth metric please click here.

3. Gross Margin: Gross margins is a very good metric for investors to evaluate the viability of a business. Gross margins are usually bench-marked against industry averages to see how efficiently a business is structured. As business owners, we have to do all we can to steadily increase this metric or find alternative methods to increase the metric through diversification. Periodic review cycles need to be implemented to ensure that the business is growing in the right direction and at the right pace. To learn more about how to calculate and use the gross margin metric please click here.

4. SG&A Growth: Sales, General & Administrative (SG&A) expenses include, all salaries, indirect production, marketing, and general corporate expenses. This constitutes the bulk of expenses that a business incurs and should be constantly reviewed. Each item needs to be evaluated and aligned with it’s contribution to the overall business vision. There needs to be a constant monitoring of marketing and IT expenditure to ensure that we are generating sufficient ROI’s for our campaigns and implementations. To learn more about how to calculate and use the SG&A growth metric please click here.

5. Operating Margins: This metric allows you to get an idea of the profitability of the business, and the potential to grow and scale the business further. To calculate this metric we need to know the firm’s operating income, which is revenue minus cost of goods sold (COGS) and general and administration (SG&A) expenses. This figure needs to be further divided by the firm’s revenue, to arrive at the percentage value of the firm’s operating margin. Businesses which operate with low operating margins must strive to reach revenue levels where they can take advantage of economies of scale. However businesses with higher operating margins can focus on providing a core group of products or services really well to its target segment. To learn more about how to calculate and use the operating margins metric please click here.

Financial metrics are important to keep us abreast about the financial health of our business. However, one should not become fanatical in using them as the sole indicator of how a business needs to be run. In many examples I have seen business owners become obsessed with hitting certain financial targets whether it be operating margins or net cash flow at the expense of the future growth of the business. There needs to be a balance and one needs to be able to see the bigger picture as well. The metrics discussed above provide an holistic picture of the current health of your business and should be used to identify areas of pain to help the business grow faster.

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Financial Metric #5: Operating Margins

“Be precise. A lack of precision is dangerous when the margin of error is small.” Donald Rumsfeld

One sets up a business with the aim of providing prospective customers with superior products/services and in return, to be highly profitable. Operating margins tell us how much money the business makes on every $ of revenue. To calculate this metric we need to know the firm’s operating income, which is revenue minus cost of goods sold (COGS) and general and administration (SG&A) expenses. This figure needs to be further divided by the firm’s revenue, to arrive at the percentage value of the firm’s operating margin. For example if the operating income is $5 and revenue is $100 the operating margin of this business is 5%. If all the other firms in the same industry enjoy operating margins of 10%, then this particular business has major issues regarding their COGS and SG&A. There are a couple of things you should keep an eye on when evaluating this metric.

1. Revenue: Calculate where the majority of revenues is being generated from? Is there a particular product or service which contributes significantly to the overall figure? Is the revenue spread out evenly over many product or services? Each scenario poses potential opportunities and risks. Over reliance on any one product may be risky as a long term strategy. On the other hand, spreading the business over many products or services opens up the possibility of newer competition attacking the business on multiple fronts. A balance needs to be found where revenue can be maximized.

2. Fixed & Variable Costs: Pay attention to the cost structure of the business being evaluated. If the business has a high fixed cost structure with low variable costs, then insufficient revenue generation means operating on smaller operating margins. This can be both an opportunity and a threat to the business. If the industry in question is relatively untapped, there is larger potential in promoting it’s product/service with low variable costs. However if the industry is saturated with large entrenched players, it then becomes challenging to grow the business significantly. Alternatively with low variable cost structures, the business has more flexibility and can usually outmaneuver larger companies.

3. Industry Analysis: How does the company’s operating margin compare to its peers in the industry? Finding this data is usually quite challenging, however rough guidelines can be found with hard work. Once we have these guidelines, the business is bench marked on various factors compared to the competition. This gives us the ability to compare cost structures, revenue splits as well as overall operating margin comparisons.

This metric allows you to get an idea of how profitable the business actually is, and the potential to grow and scale the business further. Businesses which operate with low operating margins must strive to reach revenue levels where they can take advantage of economies of scale. However businesses with higher operating margins can focus on providing a core group of products or services really well to its target segment. As a business owner, keep a sharp eye on operating margins and continue to evaluate how you stack up against the competition.

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Financial Metric #4: SG and A Growth

“There is one rule for industrialists and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible” Henry Ford

Sales, General & Administrative (SG&A) expenses include, all salaries, indirect production, marketing, and general corporate expenses. This constitutes the bulk of expenses that a business incurs and should be constantly reviewed. The entire concept of running a lean enterprise extends from the fact that we use an optimal mix of resources to achieve our target goals. However, this is usually not the case in the real world and businesses tend to inflate costs drastically whenever they have some success. This creates an unhealthy dependence on extra resources and also leads to complacency within the team. When cuts need to be made during recessionary periods,  there is a detrimental impact on the team’s overall performance in such organizations. From the onset we have to continuously monitor our SG&A growth in relation to revenue growth as well as industry averages. This helps keep an eye on the ball and puts emphasis on efficiency. When evaluating this metric there are a couple of factors to keep in mind.

1. SG&A Break Up & Alignment: How are costs distributed through the business? We need to identify which costs contribute significantly to overall costs. This helps us map out IT, marketing, sales, payroll and other components which usually make up the bulk of expenses. Once we have this breakdown, we can analyze each component further and see how it contributes to the overall strategic vision of the company. If your company has a short term goal of increasing market share in its industry through mergers and acquisitions, there needs to be focus on getting the right people on the team instead of bulking up marketing expenses. We see hence how breaking up the SG&A and aligning it in accordance to the business vision is important.

2. ROI: Each major component such as IT or marketing, needs to be measured. When assessing your business it is important to delve into each component to gauge which technologies and campaigns are delivering an acceptable ROI and which are not. This exercise highlights non performing costs which are being incurred without adequate return. It is through this exercise that one can eliminate these costs and make the entire business more efficient.

3. Growth %: One also needs to pay attention to how fast the SG&A figures grow when the business begins to scale. This percentage needs to be kept in check and must be reviewed regularly to ensure that costs are not being overly inflated with growth. This usually happens when we begin to hire too many people, launch unnecessary marketing campaigns or have technology infrastructures implemented when not needed. This leads to erosion of operating margins and can have a detrimental impact on growth. If possible benchmark your SG&A against industry averages as well to ensure that growth is specifically aligned with the overall strategic direction the business wants to take.

SG&A needs to be kept in control and be constantly reviewed. However, I do not like pegging its growth to some budgeted figure. SG&A growth needs to be aligned with the business vision. Restricting it from growing over a certain percentage may have a short term benefit to the business, it may however prevent it from reaching its long term goals.

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Financial Metric #3: Gross Margin

“An important and often overlooked aspect of operational excellence is regularly comparing actual costs to budget assumptions – not just the numbers in the plan. Understanding assumption deviations will help improve the accuracy of future forecasting.”Bob Prcsen

Before we calculate gross margin, we first need to know the cost of goods sold (COGS). These are direct expenses incurred in the manufacturing of a product, or the rendering of a service. There are many methods used to calculate this metric. Firstly it has a lot to do with the type of business one is running. For example, if you are running a DVD store do you include the store rent in the COGS, or as an indirect expense. Such questions will definitely come up when you are doing COGS calculations. You need to ask yourself “how is this expense related to the product/service?”and “if you were to take away this expense would you still be able to deliver the product or service?” Ultimately this will depend upon the product or service you are providing, the goal being to reach a figure which is an accurate representation of how much it costs to produce or deliver a product/service.

After calculating our COGS we can calculate gross margin by dividing gross profit (Revenue – COGS) with Revenue. If we sell a widget for $1 and we incur a direct cost of $0.4 to produce it, our gross margins are 60%. This is a very important financial indicator as it indicates how much cash will be  flowing into the business. When gross margin falls dramatically due to increase in raw material prices for example, it impacts detrimentally on every part of the business. It is therefore critical that management keep a keen eye on this metric and not let it drop below levels that will make it difficult for the organization to grow. A couple of things to keep in mind when looking at gross margins are:

1. Pricing Policies: When evaluating your business and finding ways to improve gross margins, pricing policies play an important role. When a business is in a competitive field, for example retailing of basic computer components, margins tend to erode due to competitive downward pressure. As a business owner one needs to continuously check on pricing strategies employed by competitors and how one can outmaneuver competition based on complementary services rather than price wars. Evaluating pricing strategies is hence critical to maintaining and improving gross margins.

2. Inventory Management: If your business currently holds large stock of products that are manufactured or purchased one needs to manage this rolled over inventory carefully. Left over inventory is a component of calculating COGS and when a business begins to hold on to larger quantities of inventory, margins begin to erode because of stock depreciation. Inventory must be managed intelligently to ensure that the business does not expose itself to unnecessary risks which will impact both its margins and cash flows.

3. Periodic Review: In today’s world where massive price fluctuations are a norm, one needs to pay very close attention to gross margins. This is especially true for business owners who operate with slim margins. In the past when I have been involved with product based retailing ventures, I set up weekly meetings to access this metric to understand how we were faring through various distribution channels so as to continuously adapt our strategy and plan according to prevailing market conditions.

Gross margins is a very good metric for investors to evaluate the viability of a business. Gross margins are usually bench-marked against industry averages to see how efficiently a business is structured. As business owners, we have to do all we can to steadily increase this metric or find alternative methods to increase the metric through diversification. Periodic review cycles need to be implemented to ensure that the business is growing in the right direction and at the right pace.

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Financial Metric #2: Revenue Growth

“Always be closing…That doesn’t mean you’re always closing the deal, but it does mean that you need to be always closing on the next step in the process.” Shane Gibson

Revenue growth is a metric which is spoken about widely whether you are a brand new start-up or an established business. It is the one metric which investors are always keen to learn about. Revenue is quite simply the number of products or services sold, multiplied by the price. Calculating revenue is fairly  straightforward. Evaluating growth of revenue over a stipulated period of time provides a lot of information regarding the future prospects of the company.

Early stage start-ups that do not have any present revenue, or then very little, need to develop projections to gauge future revenue. Hockey stick graphs are a norm when this information is produced, I  strongly advise backing up projections with sound assumptions and research. For established companies,  regular evaluations of revenue growth projections are required to ensure that they are being met. Some key factors to keep in mind regarding revenue growth are:

1. Industry Growth: One needs to first evaluate the growth speed of the market they operate in . This helps create broad benchmarks for future prospects. For example the overall print media industry is witnessing a massive slowdown in the west. Getting into this particular industry at this point in time is not a viable future growth prospect. However, the online media industry is booming and is growing at a phenomenal pace these days. When evaluating a business it is good to get a broader perspective on what is happening in the bigger picture.

2. Market Share: Depending on the market share the business currently holds, will directly impact its ability to grow revenue. For instance, if you are a market leader in office automation products like Microsoft and control over 70% of the market, a 10% yearly growth is not a realistic target. However if the market is fragmented like the hand held mobile sector, a new entrant like Apple was able to come in, almost immediately take a substantial share in the market, and has aggressive growth targets for the next couple of years. Therefore, evaluate your market position when creating revenue growth estimates.

3. Pricing: Depending on the type of pricing strategy adopted, one can determine what sort of revenue growth is possible. If for instance,  the business is planning on increasing prices next year, and even though this could positively impact margins, it could have a negative impact on units sold. This will impact directly on revenue and thus growth estimates will have to be adjusted likewise. The business must find a balance between its pricing and revenue growth strategy to reach its target.

Evaluating and estimating revenue growth is a tricky and challenging process. It requires a lot of assumptions to be made and does not take into account unexpected events and scenarios. However from a historical perspective this metric can provide a reliable indicator to judge how the business has performed and what sort of average growth figures to expect.

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Financial Metric #1: Net Cash Flow

“Performance stands out like a ton of diamonds. Non performance can always be explained away.” Harold S. Geneen

Last week I dedicated an entire series to better management of business cash flows. This is a critical function and holds the key to success for many companies. When I evaluate the health of a company, this is probably the first financial indicator that I look up. I have learnt through experiences that one can have a fantastic business model, be earning a nice profit providing a product/service, but if the business is plagued with recurrent liquidity problems I am wary about making an investment into the venture. Net cash flows is simply calculated by subtracting your cash inflows from your outflows. When looking at this metric there are a couple of things to look for:

1. Cash Inflow Trends: This provides data regarding how cash inflows have progressed over the historic period under evaluation. Is there a stable growth of inflows over time? Are the inflows cyclical in nature? How long does it take for an order to be converted into a cash inflow? What one is looking for is substantial evidence regarding the viability of growth and stability of cash streams of the business .

2. Cash Outflow Trends: At what percentage do cash outflows grow with an increase in cash inflows? Does the business experience diminishing returns after a certain inflow threshold has been reached? Are outflows cyclical in nature or is there a fixed outlay? If a business has a high fixed cash outflow without the support of growing inflows, there is bound to be a substantial cash glut at some point. Also, if inflows are slow to be realized into cash and there are long periods where net cash flow is negative, this does not reflect well on the business sustainability.

3. Overall Historic Trends: Equating both the inflow and outflow streams we get a good overall picture of the net cash flow situation over a certain period of time. This will show how resilient the business is in recessionary periods and how it conserves and invests cash during boom periods. If managed well we should see a positive net cash flow situation that will be a good representation of the overall health of the business. 

A business which is constantly plagued with cash flow gaps will have a challenging time expanding the business. Such a business must re-evaluate it’s current business model and re-analyze it’s inflow and outflow trends. Through this analysis one should be able to arrive at pain points in the current model such as “excessively long payment cycles,” and find ways to resolve this issue by tweaking operational procedures and overall business strategy. 

Related Posts:

5 Tips for Better Cash Flows

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Metrics for Business

“For me, goals and daily metrics are the key to keeping me focused. If I don’t have access to the right stats, every day, it is so easy for me to move on mentally to the next thing. But if I have quick access to key metrics every day, my creativity stays within certain bounds–my ideas all center on how to achieve our goals.” Paul Allen

My last series has led to a couple of interesting questions regarding what metrics a business owner should  follow closely to keep an eye on how well or badly the business is performing. Without access to these important facts and figures on a regular basis, the business owner tends to lose sight of the end goal and gets caught up in the daily grind of running the business. Unfortunately this leads to situations which the business may not be prepared for and can severely cripple business growth. Metrics are key tools to help give the entire team a dashboard view of how well the business is doing in comparison to the what they set out to do. Metrics can be split up into two segments, financial and non-financial. Focusing solely on just one of them will create several blind spots for the business owner.

When looking at a business, several key metrics come to mind, such as revenue, profitability, growth, customer acquisition and even customer satisfaction. Each one of these tell a story of how the business is performing in various segments. The important aspect of evaluating metrics is paying attention to the right ones. Depending on the structure of your business and the industry you are in, certain metrics will have greater weightage as compared to others. For example if you run a restaurant, customer satisfaction, table turnaround time and margins are critical metrics which need to be looked at on a regular basis. It is when we become distracted or complacent about the current situation that problems begin the creep up.

In light of this I have decided to do a two part series. The first part is going to be focused on financial metrics for businesses. I am going to select five key financial metrics which I believe are critical to most organizations. The next part of the series will be based on five key non-financial metrics that every business owner should keep a keen eye on. Systems need to be put into place to tabulate these metrics and processes outlined to make sure that they are reviewed on a regular basis. This will help business owners to see just how “well” they are actually doing. In some cases the metrics will not be directly applicable to your business model. I will be more than happy to advise business owners about varied business models in metrics that they should be evaluating for their models.

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