The Art of Measurement

by Alec Pendleton

What do you measure in your business?

Too often, the answer is: The wrong stuff.

Many leaders simply look at the numbers their accountants or  software give them, without asking: What do I really need to monitor, so that we have opportunities for improved operations — and higher profitability?

Paradoxically, when devising measurements to manage by, it’s typically a good first step to decide what NOT to measure.

A great example of this can be found in retailing. A retailer doesn’t create value by manufacturing a product. Instead, a retailer creates value by having the right product, at the right time, in the right place — supported by knowledge and service.  So to generate useful measurements for a retail operation, it’s best to start by EXCLUDING the cost of the product itself. So, if a retailer buys sweaters from a manufacturer for $39.00, and then sells them for $100.00, all measurements should be based on the $61.00 of gross margin — and not the $100.00 of total sales.

Next, figure out how much it takes to operate the store.  Look at costs of everything EXCEPT the product, and then total them for a full year. Include rent, utilities, labor and fringe benefits, taxes and advertising, etc.; then divide total annual costs by the number of days per year that the store is open. This will yield the daily cost of running the business, as in the simplified chart below:

A P Table

So our sweater merchant, with a gross margin of $61.00 per sweater, needs to sell an average of at least seven (7) sweaters a day to cover her daily cost.

Knowing this number gives the store owner tremendous power, because she now has a basis for decision-making.

What if she doubled her spending on advertising? That would raise her costs by $35.00 per day, so if the extra advertising generates just one more sale per day, she’s ahead.

What if she had a 20% off Sale? Her gross margin would fall from $61.00 per sweater to $41.00, so she’d have to sell eleven (11) sweaters per day instead of seven, just to stay even.

Measuring is important, but it doesn’t have to be complicated or precise to be useful.  A few simple calculations will improve decision-making, and greatly increase your profitability — and your peace of mind.

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