Today, it is of the greatest importance for every company on the market to introduce a system of business metrics as it help to estimate whether the company is successful and whether it has reached its goals for the set period of time.
In general, business metrics is a system of quantifiable measures that are commonly used to track a specific business process or the company’s activity in general. Use of the system of business metrics is aimed at determining whether the company is financially healthy and moves in the right direction.
Slide 2 – New Business Metrics
Today, there are many different key performance indicators, including the quantifiable measures (business metrics). To stay competitive in the market, companies have to know how successful they are and plan everything beforehand.
At the end of a certain period of time, companies have to compare their status to the one that they had in the beginning of this period. So, they can use different business metrics, such as return on assets, cash conversion cycle, inventory turnover, dollar amount of WIP inventory, customer lead time and so on. Most of them are interrelated and influence each other.
Slide 3 – Dollar amount of WIP inventory
This business metric is called the Dollar amount of Work in process inventory. It is used to determine the cash amount of the company’s inventory that has been partially completed. It is of the great importance to track this amount because inventory in process is not a ready product yet, but is not also a raw material. Usually, WIP is recorded as an asset on the company’s balance sheet as this is a half-ready product.
Firstly, WIP can show whether the company needs more place to store its inventory. Secondly, it can show whether the company is growing or it faces a slowdown. This business metric can be used by both the lower and upper management to determine the effectiveness of the business activity.
Slide 4 — Return On Assets (ROA)
Return on Assets (ROA) is widely used by the companies to estimate an amount of earnings that were generated by using the companies' assets. Basically, companies want to know how much they earn if they invest a certain sum of money and capital. If ROA is high, it means that the company has more earnings on less investments and shows that the company operates effectively.
Dollar amount of WIP inventory is usually recorded as a the company's asset, this is why it is also taken into attention when calculating ROA. In general, ROA is one of the main financial indicators.
Slide 5 — Order lead time to customers
Order lead time to customers, also called the Customer lead time, is a business metric that shows the total time during which the customer gets his or her order. This period of time is measured from the moment client places an order to the moment when the order is delivered to the customer.
Slide 6 — Cash Conversion Cycle
This metric indicated how much time it takes the company to convert the inputs of resources into the cash flow. As this measure helps to calculate the total time for the company to convert resources into cash, Order lead time to customers also influences the total time to generate the cash flow. The time is calculated starting from the moment cash was converted into inventory with the help of sales, and then back converted into cash.
In general, this metric is used to check how effectively the company's management uses assets and liabilities with an aim to generate cash.
Slide 7 — Cycle Time
In general terms, the cycle time is the total time that it takes the company to complete one certain operation cycle from the moment it starts the operation to the moment it finishes this cycle.
This term is often used in Lean Manufacturing as it is of the greatest importance to know how much time it takes to get done with an operation cycle to know where are the bottlenecks that the company can eliminate. Also, there are different types of this metric: manual cycle time, overall cycle time, total cycle time, etc. If the cycle time reduces with time, it shows that supervisors and managers are working well to eliminate weak places in the operation process.
Slide 8 — Return On Assests (ROA)
Again, Return on Assets is highly dependent on the cycle time as cycle time determines how high ROA is. In terms to ROA's dependence on the cycle time, Return on Assets can show whether the company operates better than in the previous period of time (most usually, it is a specific period — a week, a month, a year, or the time of a cycle in case it is long) and can prove the efficiency/inefficience of management.
As we can see, Return on Assets is a metric that is influenced by many other indicators, including dollar amount of WIP inventory and the cycle time.
Slide 9 — Changeover Time
Changeover time is a business metric that shows the time it takes the company to move from producing one last piece of a certain product to the first piece of another product. This time is needed for the employees to prepare the equipment to production of a new piece. Usually, this time is lost and an aim of any company is to reduce the changeover time as it directly influences effectiveness of production.
If changeover time increases with time, it means that the managers have poorly organized the operation process and it needs to be improved.
Slide 10 — Inventory turn
Inventory turn (or inventory turnover) is another business metric that can be used by the companies to estimate the number of times its inventory was sold and replaced with a new one during a specified period of time. In other words, it shows how many times inventory is sold in a certain time period. This ratio can show whether the the supervisors manage inventory effectively and how effectively sales are generated.
If inventory rate is too high, the company will not be able to meet the demand, and the company's sales will not meet the expectations.
Slide 11 — Inventory turn & Profit
As inventory turn ratio shows how well managers and supervisors manage the company's resources, Inventory turn directly influences the total profit of the company. For example, if the inventory rate is low and the company cannot sell its product for a long time, the company's profits will fall. Thus, profit will be the universal metric that shows the overall success of the company.
Basically, profit includes all the financial benefits the company has due to conducting its activities. Profit is influenced by all processes of the company; thus, all factors and indicators should be taken into account when calulating profit.
Slide 12 — Summary
Today, it is of the greatest importance for every company to have a well-developed system of financial indicators and metrics. This system will help the company's management understand whether they move the company in the right direction and whether the company is financially healthy. The slightest changes in the metrics can help to predict future losses, and take all necessary options to fix the situation.
There are different business metrics that can be used by the companies to evaluate the work of lower and upper management, and main of them have been discussed in this presentation.
