Are Critical Numbers Part of Your Company Workout?
Welcome to the idea of critical numbers. Every executive team has them (measured or not) and when you begin a new quarter, they should be top of mind. Critical numbers are key drivers that influence business performance. When you correctly identify these numbers, you’ve reduced the threat to your department or company and have increased your chance for success. Critical numbers are necessary for your company workout.
You May Wonder, “Why Care About Critical Numbers?”
Critical numbers will drive strength, endurance, and confidence in your team. Have you ever had a business goal or situation that just didn’t change, no matter how much effort you made? Have you set a goal for increased sales but the sales team didn’t budge your revenue numbers? Or have you ever tried to increase customer satisfaction with no real tangible result? Perhaps you’ve sold clients on expertise and resources that you haven’t yet hired, and every day that you don’t fill the positions and deploy personnel you’re losing revenue. These are big boulders in our business growth, and you’ll need to move them in order to take your department or company to the next level – and, moving a boulder requires strength and leverage.
Jack Stack was considered a pioneer in open-book management and he wrote The Great Game of Business – a read that has been a long-time member of my personal bookshelf. Jack came to International Harvester in 1979. By 1983 Jack and his team could see the “writing on the wall” as IH was actively engaged in closing operations and cutting costs. For fellow entrepreneurs reading today, you’ll feel an adrenalin rush knowing that Jack and his team took action and made a leveraged buyout of the plant they operated. This plant became SRC, a manufacturer of gasoline and diesel engines, parts, etc. Jack and team made the purchase thanks to a loan that never should have been made – they were over-leveraged from the beginning.
Knowing this, Jack made some key decisions early. First, he focused on a key metric and he called this a critical number. The critical number he focused on was his debt-to-equity ratio. This metric was the leading indicator showing whether financial health was trending upwards or downwards. If debt to equity was trending upward, then the financial health of the company was trending downward, and vice versa. Jack made this part of his team’s daily workout. It made them stronger, and over time built their endurance. This led to team confidence.
You should look for the Critical Number in your business - a KEY driver (or indicator) that greatly influences the performance of your business. This critical number is usually a financial or operational number. It is a number that at any time will have the greatest impact on your business and where you want to go. It is the one number that can make, or break, your department or company. A critical number is the number that you must be successful on in order to succeed or survive. Critical numbers are the main thing. Ask yourself, what is the single most important quantifiable number in my department or business?
You May Now Be Thinking, “OK, So How Do I Determine my Critical Number?”
As a business consultant, I recommend two critical numbers to counterbalance one another. Choosing just one number might cause you to over reach and strain your business (just as overuse of one muscle might cause a muscular strain), and counting every measurement a “critical number” is often the mistake of entrepreneurs and leaders in fast growing companies. Your best approach here is to follow the steps below.
Three Steps to Maximize Your Critical Number Workout.
Step 1: Choose a critical number. It sounds easy. Usually it’s not. Write down a number now, the one that you think is your critical number. Leave it on your desk until this afternoon and then verify – have you thought of other numbers that might be better measures? You’ve just experienced a speed bump. It’s the same for teams. They often struggle by making this process too complicated. They get paralyzed in the choosing, analyzing, discussing, debating, and wanting to be perfect before they can ever agree.
The answers are often obvious if we keep it simple. If you’re losing customers as fast as you can sell new ones, then your number is retention. If you’ve maxed out your line of credit, then your critical number is cash. If you have revenue and yet no profit, it’s margins. Look at your operations from 10,000 feet, and there are generally just a handful (or less) of really important numbers that you need to track. Imagine that you’ve been out of town, and out of touch, for 2 weeks (I know - it’s hard). When you return to your business, what are the first numbers you check? What’s top of your list that lets you know that your department or business is OK? This is a good place to begin your search for your critical number.
Step 2: Make the connection. Help employees understand why this number is important and how they can impact it. In the case of SRC, Jack determined that it was important to help his team get some small wins to move the critical number. Jack would tell you that every team member should be expected, and enabled, to act on knowledge and improve performance.
Step 3: Educate your team on the numbers that really matter. The first critical number that Jack used to educate his team was debt-to-equity ratio. He made sure that everyone knew how the number was calculated and all of the levers that could actually move that number. And to make the game a little more fun, he provided a stake in the outcome by designing a bonus program tied to debt-to-equity ratio improvements.
Critical numbers are an important part of your company workout. Commit, choose, and determine to track your critical numbers. Don’t lose focus by measuring too much and overwhelming yourself or your team. Most importantly, don’t assume that your team knows what’s important or that they’ll make decisions accordingly. My experience with hundreds of leaders and teams indicates this is not the case.
Read more about why you should care about critical numbers here and follow Jack Stack’s three simple steps:
- ID your critical number – Know and Teach the Rules
- Help your team gain small wins to move the critical number – Follow the Action and Keep Score
- Educate your team on the numbers – Provide a Stake in the Outcome
This clarity and focus will give you leverage to move your boulder and give you a great company workout – and that’s Barry talking business.