The study of businesses indicates that rather than simply being a little better than their competitors, the top firms are often three or four times more successful. 

Research into the reasons for success concluded that such levels of superior performance were not an accident.

There are thirteen factors that characterise the highly successful organisation:

1. A strong sense of identity felt throughout the organisation.
2. An openness to change. 
3. Authority diffused broadly throughout the organisation.
4. Ideas evaluated more on their merit than on their origin.
5. A strong sense of support of the employees for the organisation, the organisation for its employees, and of the employees for each other. 
6. Flexible organisation structure.
7. Orientation to achieve, more than to procedures or to ritual.
8. Open communications throughout the organisation: up, down and across.
9. Commonly held understanding of organisation’s objectives and values.
10. Emphasis on a program for the development of people.
11. Meetings devoted more to problem solving rather than win-lose propositions/decisions.
12. Broad content in individual jobs.
13. High performance standards.

On a scale of 1 to 10 rate your business on how good you are NOW in addressing each factor.  Be realistic. Then rate WHERE it should be, and highlight the area with the biggest gap.

Develop strategies and actions to lift your performance in the areas with the biggest gap.

While not all these factors are practical for all organisations at any given time, they are definitely worthwhile objectives to be striving for.  Success is not an accident.

• The measurement must make a difference, that is, it must be crucial to the business strategy and mission and reflect the strategy/mission.
• There must be an identifiable cause-and-effect relationship between actions and the measurement.
• They need to provide positive reinforcement for desired behaviour.
• Behaviour must be changed in a desired way.
• They need to make it clear to employees what they have to do in terms of performance to be 'successful'.
• They have to clearly distinguish between effective performance and ineffective performance.
• They must be quantifiable to a large extent, that is based on behaviour and events that can be observed and documented, and which are job-related. They should also provide ongoing feedback on standard of performance.
• Employees must clearly understand the KPI's, which need to have an unambiguous meaning. Also, consultation is more likely to result in KPI's that are relevant and valid.
• Employees must have a significant degree of control over achievement of the KPI.
• KPIs should have an appropriate time frame (see further discussion below).
• They should take into account both internal capabilities and external environmental influences.
• There needs to be alignment between individual and organisational KPI's.
• The process should be continuous, with ongoing feedback and learning.
• All areas of the business must be accountable.

Importance of balance

There are many examples of measurements that failed because they inadvertently rewarded inappropriate behaviour.

A car dealership that rewarded its service department for controlling costs might discover later that it had done so by refusing to accept customers’ legitimate warranty claims, using dodgy parts or encouraging mechanics to take short-cuts with repairs. Later on, after the measurement period is over and the staff have spent their bonuses, disgruntled customers take their cars to other dealers or trade them in on rival makes.

The cost savings are then trivial compared to the loss of customers and damage to the dealer’s reputation. Similarly, if governments apply pressure on their public transport authorities to 'just make the trains run on time', the authorities will focus on that measurement only and overlook issues such as safety and passenger needs.

These examples illustrate the importance of a 'balanced' range of KPI's. Cost control and meeting deadlines are valid and worthy measurements, but only in conjunction with other measures that collectively take the full range of relevant issues into account – safety, customer satisfaction, employee satisfaction, legal compliance, etc.

Types of KPIs

Continuing with the theme of 'balance', the authors of the pioneering book The Balanced Scorecard: Translating Strategy Into Action, Robert Kaplan and David Norton, recommend that the range of measurements chosen should include a mixture of the following:

• financial and non-financial measures
• short-term and long-term indicators
• performance drivers (future-oriented) and outcomes (past-oriented)
• quantitative and qualitative measures
• 'lead' and 'lag' indicators

Financial, quantitative and 'lag' measurements are the traditional, most widely-used measurements. While indicating current and past performance, they are not necessarily good at predicting what will happen in the future, and on their own may lead to inappropriate, short-term behaviour being rewarded, as the above examples show. They still have a role to play, and their 'actual result' status gives them credibility with many people, but on their own will not provide an accurate overall picture – hence the need for a balance.

Range of indicators to include …

Kaplan and Norton also argue that the range of indicators should include examples from each of the following:

• financial measures – including profitability, return on investment, revenue growth and mix, cost control, productivity, asset use, investment strategy
• customer perceptions – market share, customer acquisition and retention, customer satisfaction
• internal business processes -- such as customer service, innovation, operational efficiency, quality, cycles, resource consumption
• innovation & learning– measures that allow the organisation to develop, change, improve, respond to changing circumstances, and remain sustainable. The main categories are employee capabilities/skills, retention, productivity, information systems capability, knowledge management, employee empowerment, motivation and values alignment

Some later commentators have recommended that the above list also include measures of 'community perception', that is how well the organisation serves the general community in terms of corporate citizenship, environmental and social responsibility, etc.

The lists and categories also demonstrate that organisation strategy must underpin the KPIs used. As the book title puts it, they are the means of 'translating the strategy into action'.

The KPI's, need to provide a framework for both change management and performance management, and therefore overall development of the business.

Strategic versus traditional measures

The now well-documented growth of 'intellectual capital' as a proportion of the overall value of organisations’ assets is another reason to broaden KPI's away from traditional financial and purely tangible measures, and also to take a long-term and future-oriented approach with measurements.

Strategic KPI's differ from traditional ones in the following ways:

• customer-driven rather than financially driven
• more future-oriented
• more scope for flexibility
• linkages or 'value chains' can be demonstrated
• provision for feedback loops, to make the process ongoing
• several factors can be evaluated together instead of in isolation (such as cost, quantity, quality and delivery).

Remember that the basic attribute of a strategy is that it requires choosing between alternatives and possibly making compromises.

How many KPI's?

For most businesses, around 20 is usually recommended, provided the mixture covers all the requirements and types discussed above. Some large organisations, however, have much more than this – over 100 in some cases.

Software providers and management consultants now market various systems and tools that automate large parts of the measurement and summary processes.

A final warning

Developing and setting effective KPI's can be a lot of hard work to get it right. It requires long-term commitment and resources. Don’t treat it as another fad or quick fix.

Contact your Newcastle Partnercorp facilitator if you need to ask any questions or need some assistance in developing KPI’s for your business and people.

If you say things like “I’m hopeless with money”, replace this with “I am improving how I use money everyday”

• If you fear your future financially, replace this with, “I have all the resources I need today, and constantly explore how I can be more effective with money.
• If you are wealthy, and your wealth is your identity, shuffle this to “I am grateful to have the ability and drive to create wealth for myself and others”
• If your self-worth is linked to what you get paid per hour, move this to “I am regularly seeking ways to improve myself, my knowledge and my skills, and bring this package to benefit others”
• If you think that you would be happier with more money, replace this with “My happiness comes from the inside”
• If you say things like “Money is an area I know little” replace this with, “bit by bit I am learning more about how to use money in a way that enhances my life”.

Do you have a NEAT Business?

Looking for a simple way to analyse your business and to provide a framework for developing some action plans? Our NEAT Business concept is based on some of the key drivers of profit in your business.

NEAT Analysis

We have developed a simple methodology for looking at our marketing and business development options and have called it NEAT, which stands for:

Now, N x E x A x T = Profit

You can look at NEAT from a whole business perspective or on a business unit basis, if required. It is usually done on an annual basis.

Number of Customers simply stands for the number of Active Customers in your business. In most businesses active customers will be those that have purchased off you in the last year or two. In high turnover businesses , eg. NewsAgents, active customers could be those that have purchased off you in the last 3 months. In the building industry, it could be people that have purchased off you in the last 5 to 10 years.

In any case, count or estimate the number of active customers in your business. You can usually get this information from your bookkeeping systems although in a retail environment this maybe difficult, so estimate the number.

Efficiency is usually measured as Net Profit/Sales and expressed as a percentage. For example: if you make $100,000 Net profit on $500,000 worth of sales then your E is 20%.

Average Sale. This is an important measure because it looks at the average $ spend per sale. To determine what this is, look to your records eg. bookkeeping systems or cash registers. From a bookkeeping system, simply divide the Total Sales by the number of Invoices and cash sales. From your cash register, record the total sales $ for a period and count up the number of actual sales in the same period and divide. So how much are your customers currently spending each time they do business with you?

Transaction Frequency. Quite simply, how many times do your customers buy from you in a year? To work this out divide the number of invoices or sales calculated above by the number of active Customers. If you are in a high frequency business, this could be a number between 50 and 100 (once or twice a week) or a low frequency business eg. building this transaction figure could be 0.1 (once every 10 years).

Working out the NEAT Values for your Business

As mentioned above, multiplying your NEAT components together should give you a measure of your profit. If we break down the basic components we can see the components of sales and efficiency.

N x E x A x T = Profit

(N x A x T) x E% = Profit

Sales x Efficiency% = Profit

Customers x Sales x Transactions x Efficiency % = Profit
1 Transaction Customers

Now, complete the calculation using the figures for your business: For example: if we have: 200 customers, sales of $1,000,000pa.; Net Profit Margin of 15% of sales; 5,000 invoices (transactions) per annum, then your NEAT calculation would look as follows:

N = 200 Active Customers

A = Average Sale = Sales/Transactions
= 1,000,000/5,000 = $200/ Sale

T = Transaction Frequency = Transactions/Customers
= 5,000/200 = 25 per Customer per annum

E % = Efficiency % = 15%

Check that: N x A x T = Total Sales (200 x $200 x 25 = $1,000,000)

Check that: Sales x E% = Profit ($1,000,000 x 15% = $150,000)

This is all very interesting but how do I use it?

Once you have your NEAT components, you can start to analyse your business. There are 6 easy steps:

Step #1: Start with N (Customers). How many active Customers do we have? What proportion of our total customer list are active? For example: if we have 1,000 Customers on file over the last 10 years, but only 200 are active then only 20% of our Customers are active. How can we rejuvenate the 80%? How can we attract more Customers? How do we stop the "churn" in Customers? How many of our active customers are "A Class" customers? How many are "C Class"? How will you find more A Class? Brainstorm your actions and look at the impact you could have on N. Write down the new N number.

Step #2: Improve Efficiency %. Efficiency % is calculated by profit over sales. The difference between sales and profit is composed of costs. What can we do to reduce our costs? How can we become more efficient? How can we reduce our Variable Costs? What can we do about overheads and finance costs? How does your business compare with other businesses in the same industry? Brainstorm your options and calculate the impact these will have on your efficiency %. Write this number down.

Step #3: Increase Average Sale. Look at your average sale. How does this compare with what you thought your average sale was? Most businesses over-estimate their average sale figure. How can we improve this figure? Look at adjusting your pricing? What would have to change about your goods and services for you to command a higher price? How can you package products and services to add value? How can you up-sell to better quality, higher margin goods? Can you cross-sell and introduce additional items with the sale (eg. "Do you want fries with your order?")? Brainstorm your options and estimate your new average sale figure. Write this down.

Step#4: Increase your Transaction Frequency. How can you increase the number of times your customers will buy from you in a given period? How can you bring them back to your business on a more frequent basis? How can you keep in contact with your clients? Do you have a contact program? Why not - it is the most effective way to ensure that you are in contact with your customer base? Do you collect contact details? Do you have a loyalty program? Again, write down your options and estimate the impact on the number of transactions.

Step #5: Calculate your new NEAT. Simply multiply your new N x E x A x T to get an estimate of your potential new profit. How does it compare to your current profit levels? Is it worth an investment of time and resources to grow to this level?

Step #6: Prioritise and Action Plan. Given that most business have limited resources of capital and labour, you won't be able to do everything on your NEAT lists. What are the 3 most important things that you need to do based on the NEAT Analysis? Select the 3 that will have the biggest impact and develop action plans to implement the solutions.

Develop a Contact program for your Customers and prospects as a matter of priority. This is an essential tool for any business and usually has a very quick payback period and develops long term relationships with your customers.

Contact your Newcastle Partnercorp facilitator if you need to ask any questions or need some assistance in developing a NEAT view of your business.

More Profit improvement ideas? Click Here

It is important when planning a funding strategy to consider the most suitable type of investor. Each type will have their own objectives and "limits" that they will stick to. Investors want ONE thing - to make a return on their money.

Generally companies will go through a number of funding rounds to achieve their strategy - this is driven by the stage they are at and the perceived risk that investors are willing to take. The earlier the stage, the higher the perceived risk and consequently the less money that is available.

To be successful you need to be clear about your funding strategy - otherwise you are likely to get the wrong type of money at the wrong time from the wrong investor on the wrong terms.

How much do you need ?

It is important to understand that money comes with different costs. Cash is cheap, debt is more expensive, equity can be very expensive. Once you sell equity (shares) it can be very expensive to get them back again. The earlier you release equity, the lower your company valuation is likely to be and hence the more equity you are likely to have to release.

Consequently, funding tends to be done in rounds, sufficient for the needs of say 1 year's trading to minimise the 'cost' of equity. But make sure you take more than you need. Raising funding when you are desperate is both difficult and costly.

How many rounds of funding ?

Most companies do 3 to 5 financing rounds prior to an exit (IPO or acquisition):

• The first, or seed funding, is a small one - sources are usually family, friends or business angels. The objective is to get your product to the early stage and prove your concept.
• The second round is a more formal round aimed at getting the product into the market - sources can be further business angel funding, debt funding (certain banks provided Government supported loans or mezzanine products as well) or venture capitalists (VC). The scale of this fund raising is likely to be several times more than the first round.
• A third round, would tend to be from corporate and institutional investors (possibly companies strategic to your success and further VC money). At this stage an exit strategy would also be a requirement of the funding.
• A fourth or fifth round may be similar, possibly including an investment banker

• Larger manufacturing and processing companies can typically consume $10 to $40 million in investment prior to exit

 When should you raise it ?

Before you need it ! Raising finance take time - often more than you think - you should allow at least six months per round (sometimes up to nine months).

Be sure you won't run out of cash. Ensure you choose your bankers carefully at the start. The strength of that relationship is crucial and could be necessary to call upon if financing takes longer than expected.

What are investors looking for ?

When investing they will generally look for:

• a new or improved product or service
• the technical skills
• the creation of intangible assets in the earnings
• marketing and management skills
• financial skills to maintain control
• cashflow generation

What should you look for from investors ?

You will be with the initial investors typically for between 2 and 7 years - so choose carefully. You should be looking for people who have:-

• genuine enthusiasm for your ideas a rapport with you
• understanding of your product / industry and sector experience
• contacts more money if (when) required

You should also think about whether you want an 'active' or a 'passive' investor - generally the earlier the stage, the more 'active' the investor will want to be. VCs usually want the option to be able to appoint a board director or two, and will often 'suggest' appropriate non-executive directors to support the business.

Set out your parameters before you start

Have a clear understanding of how far you are prepared to go in terms of: Shareholding % available Control prepared to relinquish (e.g. board positions)

In the early stages you should be prepared to have to relinquish between 20% and 40% of the company. (There may be significant points resulting from local legisation)

Most investors do NOT want to take control, indeed for some their own constitutions may not allow them to do so. But you must ensure you stay in charge on the board. Between 20% and 40% of the board positions may be allocated to investors - more may be trouble to control. Balance this with the fact though that strong investors can make all the difference.