Know Your Measures

Measure your business for success

Clearly Define Your Successes and Opportunities

Motley Fool recently published a really interesting article, entitled “Tyranny of the Calendar” on using annual returns as a measure of money management success.  They effectively argued that the focus on one year returns provided a slanted view and that even the best money managers could look much worse (or even better) using such a narrow focus.
For example, to borrow from Motley Fool, Warren Buffet can be made to look much worse a money manager than we all know him to be. By that measure, if he is “the most successful investor of the 20th century” as Wikipedia tells us (and I read it on the internet, so it must be true then he’s a good measure.  Since 1964, Warren Buffet has beat the S&P Index by over a million percent.  I’ll take those odds any day.  If you look at near-term returns, he looks about like a coin toss.
Warren Buffet Success Using time measures from Motley fool
This started me thinking, do we suffer from this in business? I would argue that often we do. Of course, we need benchmarks and comparisons can be useful, but it’s always important to understand our measuring stick.  Use the wrong measure and suddenly our performance can be much worse, or much better than it actually is.  Annual comparisons can be helpful, as can comparisons with your competitors or adjacent companies.  At the same time, know the differences and be able to build them into your forecasts.  If you sell umbrellas and there was record rainfall this year, then maybe you didn’t get quite the growth you expected.
Similarly, the wrong measures can often hide important facets like cash flow problems, inventory, declining sales, inability to keep up with demand or any number of measures that could sink your business if you’re not careful.  This is why we want to take a look at our business holistically.  Know what has changed, the impact it has had and use that to project the impact for other changes.
We often use these measures because the accountants do.  Every quarter and year we have to do our books in order to do our taxes.  This drives a whole business cycle.  “Earnings season” even affects big businesses, probably more so, to make short term decisions often while sacrificing long-term decisions. Thankfully, as much as we may be tempted to do so, as small business owners, we don’t have to suffer from that.  We will do taxes, but we don’t often have shareholders to please and if we do, we likely can speak to them personally and aren’t trying to manage the market reaction to announcements.  That should help us to plan further out and make decisions that are best for the business as a whole and not just for the current or next quarter.
Your measuring stick can make a huge difference in how we view our business and our success.  Make sure that you know the limitations and perspective of how you are measuring your business so that you make decisions that are best for your business and not skewed by the lens through which you are viewing the world.  Otherwise, even a million percent won’t look successful.

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