Question

Question Five

1. Think of the university where you are studying and answer the following: If you were asked to identify 2 key financial performance measures and 4 non-financial performance measures which need to be monitored, what would they be, and why?                                                                                                                       

       2. What are the problems with simply measuring key performance targets in a rather static (say, annual) way, particularly for fast-moving organizations which are exposed to significant external change?

Answer 1

1.Profit Margin (PM)

If it costs you more to generate the revenue than the revenue you generate – that’s a negative PM and your business is not long for this world. That is, unless you’re incredibly well financed and have deep pockets.

If not, turn your attention to where and how you’re spending your money. Where is your money going? Which expenses are out of control? Which are necessary expenditures and which are not? Which expenses help generate revenue?

And don’t overlook the revenue side of the coin. Are you charging enough for this or for that? Does your pricing model need revision? Are your programs stale?

2 – Average Daily Attendance (ADA)

A simple KPI but one that can get blurry. Is your studio full of Class Passers who pay next to nothing and have no intention of ever joining your studio or paying full price for a class? Good for Average Daily Attendance, terrible for Profit Margin or Client Retention Rate.

There are lots of methods to achieve your ADA goal. Give away free promo items, run special promotions, bring a friend, special this or that are all ideas. But be careful. While there’s validity to ADA as a marketing strategy, make sure there’s a sales acquisition strategy to support it.

There are a number of meaningful non-financial metrics. We believe that four categories have significant impact on corporate performance:

1.Company reputation

2.Customer influence and value

3.Competitiveness

4. Innovation

All of these non-financial metrics fall within the purview of the Marketing organization. Therefore, Marketing professionals must gain more experience measuring non-financial metrics. The more experience you gain, the greater your opportunity to create a wider range of predictive, forward-looking managerial tools will become.

Key Non-Financial Metrics for Every Marketer

Not sure where to start or if you have tapped into the right non-financial metrics? Here are six key non-financial metrics that Marketing should own.

Brand Preference: This measure helps you understand the position of your company and your products and services in relation to competitors. Many marketers talk about awareness, which addresses whether people know you exist, but what truly matters is whether you are among “the chosen.” If you are conducting awareness studies, consider modifying these to learn how your company and its offerings rank in consideration. Your goal is to understand how you stack up relative to the competition.

Take Rate: Ok, you’ve built preference; the next key non-financial metric is your take rate. This is how many customers/prospects act on your call to action, whether this is an offer to download a case study, sign up for a free trial, or schedule an appointment. Calculating take rate is relatively easy. Here’s a quick example. Let’s say you are a cyber security company and you create a campaign that offers a 20% discount on a risk assessment to anyone who signs up within the next 30 days. The campaign costs $10,000 (direct and indirect.) Your email sends the offer to 1000 customers in your database and 100 register for the offer. Divide the number of uptakes (100) by the number of customers you engaged (1000). In this case 10% is your take rate. The acquisition cost is 10,000/100 or $100 per registrant. Is this a good number? We can decide whether the investment is a good return by determining whether the campaign had a good return and whether the people who took the offer bought the security services.

Customer retention and churn: These metrics are different sides of the same coin. While many marketing organizations focus on customer acquisition, adding customers while a significant number of existing customers are exiting out the back door is a sign of trouble. Retention is how many customers continue to buy from you and churn is the number of existing customers who are no longer buying your products or services. Obviously the goal is to increase the retention number and reduce the churn number. The key is to define when a customer is no longer a customer. For example. If your company provides a subscription based product you might decide defection/churn is 30 days after the renewal date.

Customer experience: Customer experience has direct impact on customer retention and churn. To measure customer experience you need to take into account all of the major touch points where a customer interacts with your company. Once you have these you will want to establish key criteria for what constitutes a superior vs. subpar experience.

Innovation: Innovation is your ability to bring new products/services to market successfully. Both the number of new products in the pipeline and the adoption rate of these new products reflect your company’s ability to bring value to your customers and the market.

Market share: Each of the prior metrics: preference, customer retention, take rate, customer experience, and innovation impact your company’s market share. Note that a key word in this metric is market. Market share is a primary measure for both the company and marketing’s success. An increase in market share has a number of benefits, including better operating margins, one of those financial metrics company’s often track.

Question 2

Getting on top of financial measures of your performance is an important part of running a growing business.

It will be much easier to invest and manage for growth if you understand how to drill into your management accounts to find out what's working for your business and to identify possible opportunities for future expansion.

Measuring your profitability

Most growing businesses ultimately target increased profits, so it's important to know how to measure profitability. The key standard measures are:

Gross profit margin - this measures how much money is made after direct costs of sales have been taken into account, or the contribution as it is also known.

Operating margin - the operating margin lies between the gross and net (see below) measures of profitability. Overheads are taken into account, but interest and tax payments are not. For this reason, it is also known as the EBIT (earnings before interest and taxes) margin.

Net profit margin - this is a much narrower measure of profits, as it takes all costs into account, not just direct ones. So all overheads, as well as interest and tax payments, are included in the profit calculation.

Return on capital employed (ROCE) - this calculates net profit as a percentage of the total capital employed in a business. This allows you to see how well the money invested in your business is performing compared to other investments you could make with it, like putting it in the bank.

Other key accounting ratios

There are a number of other commonly used accounting ratios that provide useful measures of business performance. These include:

liquidity ratios, which tell you about your ability to meet your short-term financial obligations

efficiency ratios, which tell you how well you are using your business assets

financial leverage or gearing ratios, which tell you how sustainable your exposure to long-term debt is

Cash flow

Bear in mind that even though you are likely to use an increasing number of financial measures as your business grows, one of the most familiar – cash flow - remains of fundamental importance.

Cash flow can be a particular concern for growing businesses, as the process of expansion can burn up financial resources more quickly than profits are able to replace them.