Troubleshooting Your Critical Numbers

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Critical numbers are the key financial indicators that determine your company's success. When they move in the right direction, you know you're on track toward achieving your objectives. That means that choosing the right critical numbers to track is vital. Try to avoid these potholes that have sidetracked other companies.

• Poor strategic planning. A company aims to increase gross margins. Marketers and salespeople dutifully concentrate on old, high-margin products and neglect newer but lower-margin ones. Result: company grows increasingly dependent on yesterday's wares.
• Identifying the wrong drivers. Jack Stack, CEO of Springfield ReManufacturing Corp., tells the story of the hotel manager who wanted to increase profits by controlling expenses. Trouble was, he wasn't filling enough rooms to make money no matter how low his operating costs. "His real critical number was his occupancy rate."
• Relying on bad information. A large service company wants to reduce the unit cost of delivering its service, so it shuts down small, apparently inefficient regional offices and transfers their functions to bigger cities. Only later does it discover the smaller offices were actually the low-cost deliverers.
• The number nobody understands. "One company decided its critical number was economic value added (EVA)," reports consultant Bill Fotsch. "They weren't wrong. In fact, that measure reflected a lot of what they needed to do. But no one got it! They went a year and nothing happened."
• Premature self-congratulations. You do industry comparisons and find that your return on sales is high. No need for critical-number analysis? Look again. Maybe competitors are spending twice as much on R&D as you are. The idea is to identify weaknesses, not just strengths.

Copyright © 1999 Open-Book Management Inc.

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