Stop Tracking Useless Metrics — And Find Your One Critical Metric
This is the 2nd in a series of posts about building a self-managing company, outlining the process I used to almost completely remove myself from Sacred Rides, a 7-figure, 50-person adventure travel company I founded. I had to remove myself for my own sanity — I was burnt out, unmotivated, and had caused damage to my relationships with the people I loved most.
I wrote a 7,000-word article about it on Nov. 1; these 10 follow-up posts go into more detail about each of the pillars of my strategy. You can find a full index/table of contents linking to each of the 10 posts here.
“What are your revenues?”
So begins a typical conversation at a typical entrepreneur-networking event.
The question kind of makes me want to barf in my mouth a little bit. Not because I’m secretly jealous of people running huge companies (I truly am not), but because I hate the assumption that goes with the question: more revenue is better, and more revenue coupled with hyper-growth is even better.
Why do we use revenue, and revenue growth, as the primary measures of success in the entrepreneurial world?
Sorry, I meant to say… Why the f!@# do we use revenue, and revenue growth, as the primary measure of success in the entrepreneurial world?
[begin rant]
ALL HAIL KING REVENUE
Revenue is a central consideration and conversation in the entrepreneurial world. It’s just taken as a given that what entrepreneurs do is: grow their companies, and they grow them as quickly as possible.
Then when they do that, we celebrate them and put them on magazine covers and give them awards.
A lot of entrepreneurial events I attend use a minimum revenue number as a prerequisite for attendance. Entrepreneur Organization, the world’s largest entrepreneur forum network, uses minimum revenue as their criteria for admission.
The Inc 5000 celebrates the 5000 fastest-growing companies, by revenue, in the USA. The Profit 500 does the same for Canadian companies.
The not-so-subtle message is that revenue, and corresponding rocketship growth, is the primary metric when it comes to evaluating a company.
Don’t get me wrong, I have nothing against revenue (you need it in order to be a company), or revenue growth (revenue growth generally leads to more hiring, which is good for the economy).
But they’re just two metrics used to evaluate companies, among thousands, so why do we place so much attention on revenue and growth as a measure of success?
I know a lot of fast-growing companies that are horribly managed. They have terrible business models, they have massive turnover and they’re the owner/management team is too busy to treat their staff well (when you’re in rocketship mode, staff can easily become just another resource to fuel the growth).
Hyper-growth tends to create a s@#$load of problems along the way, because the founders’ skills lie in generating growth, not in managing it.
I’ve had candid conversations with many entrepreneurs who tell me that managing their $100M+ company is killing them, making them unhappy, and they wish they could turn back the clock to when they were smaller or just started out.
I also know people leading 8-figure companies that can barely afford to pay themselves. In addition, I know of companies in the middle of rocket ship growth that are barely able to make their next payroll.
Revenue and growth do not necessarily equate to a good company or a happy owner.
PROFIT FIRST
As I wrote about in my 7,000+ word blog post, ‘The Four-Hour Workweek — For Real’, back in the spring of 2017, after years of aggressively pursuing revenue growth, I hit a wall and made a number of significant changes to my company Sacred Rides.
One of those changes was reorienting our focus away from revenue and towards a more important metric: profit. Over the past 3 years, we had pursued an aggressive growth strategy, fueled by investor money. Revenues had grown steeply, but profit had suffered, to the point that we had become unprofitable.
Looking at our cash forecast, I realized we would run out of money at our current pace. I had two decisions*: 1) raise money from investors again or 2) fix our business model so that we became profitable again.
*debt was not an option I was willing to consider; we already had a high debt load.
I chose #2 (I couldn’t stomach the idea of raising money again) and spent weeks diving into the numbers behind our business model. No longer would revenue drive our decisions. Everything would be oriented around profit, because without it there would be no company.
I dove into every spreadsheet and report I could: income statements, balance sheets, detailed breakdowns of all of the trips we ran, our monthly expenses (line by line by line).
I discovered that:
a) Our gross margins (the profit we make on each trip, as a percentage of revenue) were way to low (as low as 10% in some cases)
b) Our operating expenses were too high — we had to make crazy sales targets in order to cover operations
c) We were running too many trips and spreading out our customers over too many departures (the fewer the people on a departure, the lower our margins)
As I looked to reorient the business model toward profit, the framework developed by Mike Michalowicz, in his amazing book Profit First, guided my approach considerably.
The premise is simple: most entrepreneurs look at profit as something that is left over (if at all) after you collect your revenue and then pay your expenses. Often that leftover is just crumbs, or there is none at all.
Profit First means a reorientation towards thinking of a business’ primary goal as generating profit (seems pretty obvious, right? But so few entrepreneurs think this way — they buy into the revenue growth myth).
What that looks like in practice:
- Make a revenue forecast based on prior performance and expectations
- Decide on a profit goal: this could be a net margin of, say, 5–10% as a starting point for companies that have not traditionally been profitable, or 10–20% for companies that already have a track record of profitability
- Deduct the profit from the expected revenue. Then assess what needs to happen in order to keep expenses at a level that will allow for the desired profit. This can involve reductions in overhead or changes that will affect cost of goods sold (COGS) and/or gross profit
For instance, let’s say you have a company that, for simplicity’s sake, is expected to generate $1M in revenue over its next fiscal year. Profit has traditionally hovered around breakeven for the last few years, and the owner would like to change that in order to build up cash reserves.
Starting with a 10% net margin, that means $100,000 in net profit. Which means keeping expenses to a ceiling of $900,000.
Let’s say this company has averaged $600,000/year in COGS and $400,000 in overhead/operating expenses. So with the $100,000 in savings that needs to be found in order to hit profit targets, this could either be a reduction in COGS, or in operating expenses. It means reducing expenses and holding to a strict budget in order to achieve those reductions (and hence net profit). Generally overhead is easier to reduce than COGS, but there are often opportunities to be found in COGS as well.
NOTE: If you use Quickbooks Online for your accounting/bookkeeping, it has a great budgeting feature that allows you to set monthly budgets and will give you reports showing your expense (and even revenue) performance relative to budget.
Once the changes are in place, it’s your job as owner to keep expenses on budget. Then you set up a separate bank account for your profit, and you start putting away the money you need in order to hit your annual profit goal into your profit account, month by month.
Many of us are used to doing this for our personal lives (squirreling away $ into an investment account every month), but very few business owners I know do this — they just look at profit as something that just ‘happens’ (if it happens) at the end of the year.
Why not get intentional about profit?
CH…CH…CH…CH… CHANGES
For Sacred Rides, changing from a revenue-growth-driven company to a profit-driven company necessitated several changes:
Raising prices: Our gross margins were too low, and I knew we couldn’t really cut COGS without affecting quality, so on July 1, 2017 we raised our prices by an average of 20%, making Sacred Rides among the most expensive suppliers of mountain bike adventures in the world.
I felt confident that we could deliver a better product than anyone else, and knew that there were enough customers out there that would pay for quality (and who recognize that you have to pay for quality.)
Increasing gross profit through scarcity: Also in September, we reduced the total number of trips we would run in 2018 by 1/3.
The net effect would be that we would run fewer departures but would hopefully have more people per departure, which translates into considerably more gross profit (trips with low #s have very little profit, while trips with high #s of passengers have margins as high as 60%).
Cutting overhead: In September of 2017, I reduced our overhead by almost 40%. Some of this was easy (getting rid of software we didn’t really use, cutting our developer budget, eliminating waste) and some was really hard (laying off staff and reducing one team member to part-time hours). But it was necessary if we were to survive.
I also realized that part of why I’d been so interested in growing the team was the ego-stroke of being able to say how many people I manage. What madness! I know very few entrepreneurs who enjoying managing people.
The net effect of these changes didn’t help my ego. I would probably have less revenue, would definitely have fewer staff, and we would run fewer trips. But I was able to quickly and easily come to terms with no longer being driven by revenue.
Our new breakeven sales targets were now almost 50% lower than before. We could have a drastic drop in revenue and still be profitable. Which would ultimately be way less stressful.
As long as my ego was OK with being a smaller company — and it was — then we as a company would be OK.
It also meant making profit the central topic of our conversations around metrics or KPIs (Key Performance Indicators). We would pay attention to profit on a daily, weekly, monthly, quarterly, and annual rhythm. Conversations would revolve around our ability — or inability — to hit profit targets, and it became our primary focus. Growth was no longer a precursor for our continued existence as a company.
MEANINGFUL METRICS
I’ve always hated the implicit assumption in entrepreneurial circles that a company without revenue growth is a dying one.
A company can have flat revenues — or even declining revenues* — and still crush it on much more meaningful metrics, like:
- Profit
- Staff happiness
- Customer happiness
- Customer loyalty
- Product quality
- Positive impact on the world
- Reduced environmental impact
- Shareholder returns
- Shareholder pride
- Owner happiness
- Owner pride
Of course, you can’t have declining revenues forever, but in the short term it’s not necessarily a bad thing.
ONE METRIC TO RULE THEM ALL
Even though I’ve talked about profit as a meaningful metric, the problem with focusing on profit as a key metric is that it’s what I call a ‘downstream’ metric…
i.e. it’s a metric that is affected by several upstream metrics, and not generally one that you can directly affect (try telling your operations director ‘Make us 20% more profit next month’). What lever can you pull to just ‘make’ more profit?
There are multiple contributors to your company’s profit, obvious things like gross margin, Cost of Goods Sold, Monthly Overhead, etc.
In almost companies all of the companies I’ve worked with I’ve mentored and consulted with hundreds), they often have one metric/Key Performance Indicator that has a disproportionately large effect on profit — this is what I call the Critical Metric.
Often, paying attention to and working incessantly to improve this metric will improve overall company profitability and company performance.
Example
At Sacred Rides, after much investigation and deliberation, I discovered that our Critical Metric was gross profit/departure.
Because the profitability of our trips varied widely based on numerous factors (the # of people on a trip, the pricing of the trip, budget overruns, etc.), we often had massive fluctuations in profit: situations where a trip would run one week and make us $30,000 in profit, while the next week we would run a trip and make $3,000.
As we started tracking gross profit/departure more closely (on a weekly basis, with me, my operations director, and my bookkeeper), we started noticing these fluctuations and started asking why they were happening. Prior to that we might have simply looked at the monthly P&L to assess the company’s performance as a whole, which would have masked serious issues with our gross profitability.
This led to a whole slew of changes that have now made the company much more profitable, and we continue to track gross profit/departure on a weekly basis.
Your Company
Although your company is probably totally different from mine, with a totally different business model, it is likely very similar in that there is one metric that does a lot of the profit heavy lifting. It just takes a little digging and patience to figure out what it is, and it’s not always obvious.
Another example: My friends Jordan and Megan run Shift Collab, a therapy clinic in downtown Toronto with multiple therapists and multiple therapy rooms. Their clinic is located smack dab in one of the most expensive neighbourhoods for real estate in Toronto, and I can imagine that their rent is quite expensive.
Given that every minute a room is empty represents a money-losing minute (they’re paying rent but not earning income when it’s empty), a critical metric for Shift Collab is ‘%-of-total-room-hours-generating-income’.
That’s a pretty clunky metric, and I could come up with another name for it, but it’s an example of what I’m talking about when I talk about a critical metric: what % of the time are those rooms making money, and what % are they sitting idle and costing money?
What makes metrics useful is that by tracking them, you can make more informed decisions about your company. Tracking the above metric on a weekly — or even daily — basis would lead Jordan and Megan to make business decisions that will likely make a significant contribution to the clinic’s profitability. Such as…
- If they’re slammed at peak hours and having to turn people away at those times, offering slightly discounted rates for off-peak hours to spread the demand around
- Renting out the rooms at off-hours when there is no conceivable demand for therapy (e.g. renting them out as practice rooms to musicians, who might want to rehearse at 1am)
- Bringing on more therapists and offering available room times to them on a commission-only basis (no risk for the therapist, extra income for Shift)
- And many more ideas, based on the idea that an idle room is money out the door
The way I’d work with this metric is to:
1) set up some sort of system whereby the room bookings can be tracked (e.g. booking software)
2) Set up a Google Sheet or similar software where data can be inputted and displayed (e.g. one field for total room booking hours, another field for total hours available (e.g. 5 rooms * 168 hours/week = 840 hours), and then a 3rd field showing the $ of time booked (this one is the critical metric)
It might look something like this:
3) I’d then make sure that last metric (% of room-hours booked) is part of our daily discussion; that it’s posted somewhere everyone can see it; that I talk to my accountant about it, my advisory board, even my patients, to source ideas for how that number can be increased.
4) Finally, I’d set monthly and quarterly targets for increasing that metric.
5% increases per month are typically easily achievable for many metrics. If they were to increase that amount by 5% each month (ie. if baseline is 20%, then a 5% increase means 21% — not 25%), then by the end of the year they would have an 80% increase in that metric, which could very likely double or even triple their profit. (a 10% monthly increase is feasible as well, and it would translate to a 214% increase by year’s end)
So let’s stop blathering on and on about revenue and revenue growth. Let’s stop puffing out our chests and pretending that revenue and revenue growth are important things to focus on.
Let’s have meaningful conversations about what really matters in the entrepreneurial world, and how we can create better companies and become better human beings in the process.
What are your meaningful metrics? I’d love to know — post a comment below!
READY FOR MORE FREEDOM?
I’ve created an easy 10-point ‘Entrepreneurial Freedom’ checklist that you can pin to your wall to use a guideline for removing yourself from the day-to-day of your company — and have it thrive without you!
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P.s. I hope you enjoy my posts and find value in them. If you’re interested in exploring topics like this further, there are a few additional ways I might be able to help you:
1. Join me and 20–30 other entrepreneurs at one of my upcoming Mastermind Adventures retreats, where we explore topics such as these and where you can connect with, learn from, and have crazy-fun adventures with your fellow entrepreneurs.
2. I create a bit of space in my schedule to coach overwhelmed entrepreneurs (typically leading companies from $500K to $5M) on how to get out of their team’s way, free up their own time and have self-managing companies that create less stress and more joy in their lives. Find out more.
3. If you’re in Toronto, join my event mailing list and get notified about upcoming community-building events I put on for local entrepreneurs, like workshops, dinners and get-togethers.
