The CFO'S Perspective

Business Drivers - Monitor, Measure & Leverage for Future Performance


What senior manager hasn't looked into the future to plan the growth of their business? The forces that drive the market acceptance and commercial success of your organization are going to vary depending on the nature of your products and services.

Whether you're in a traditional industry or a new one, business moves faster than ever today. Every millisecond a new app is download from Apple's online store. Walgreens now offers a walk-in one-minute flu shot, and customers can drop off their Fed Ex packages in the process. Any organization that wants to ensure its future must first figure out how to measure its past performance and then leverage that information to inform current decisions that impact their ongoing success.

Identifying Business Drivers to Measure Performance

It's a sobering fact that as many as 96% of businesses fail in their first decade, so being part of that 4% should be a top goal for any enterprise. Few companies succeed without a plan, so putting the right measurements in place to take a close look at past performance to strategically plan for the future is essential. What many companies fail to realize is that this isn't a cookie-cutter process, meaning that what works for one business or industry may not work for another.

Business executives know they should measure their performance, but many either don't, or they measure the wrong things. Your company's business drivers are the conditions, resources, or processes that are vital to the continued success and growth of your organization. Ideally, a business driver is something that is both under your control and measurable. There may also be outside business drivers that you can't influence, such as international trade restraints that will have an impact on your business decisions.

Your company's business drivers can affect all financial aspects of your business including revenue, expenses, and the cost of capital. One of the ways that you can identify drivers is by examining each line of your organization's financial statements and asking the question, "what factors drive this number?" Some examples of common business drivers include:

  • Number of products sold
  • Number of stores or locations
  • Prices of products or services
  • Efficiency of salespeople
  • Labor costs
  • Inventory turnover rate
  • Market forces
  • Other overhead costs
  • Website traffic or conversion rates

The choices your company makes when deciding what to measure will directly impact your ability to move the needle and translate that information into future positive results. While we've provided several common business drivers, this is not a one-size-fits-all choice. Here are the stories of two different businesses to illustrate how the various types of business drivers can be used in measuring success.

Business Drivers in a Traditional Manufacturing Environment

There are still plenty of privately-owned traditional manufacturing businesses throughout the U.S. A few examples on the largest scale are Cargill, Albertsons, and Koch Industries. These companies are the product of decade's worth of planning, measuring, and analyzing their business drivers for the growth that has turned them into multi-billion-dollar enterprises today.

Any privately-owned company with similar aspirations will need to do the same. Let's assume that you have a food manufacturer with multiple retail outlets. Your company uses only high-quality ingredients and adheres to the strictest production standards.

Assuming your goals are to generate steady growth with internally-generated capital which will enable multi-generational legacy, you will need a plan. Some of the business drivers that you can use to monitor results and leverage future performance include:

  • Manufacturing. On the manufacturing side of your business, you should have business drivers that allow you to monitor past performance while planning for the future. These include:
    • Labor costs. Strategic use of overtime vs. additional full-time employees (FTE) to meet peak customer demands.
    • Inventory. Accurate tracking the shelf-life of perishable raw materials and finished goods vs. forecasted demand, to maximize just-in-time production capability and minimize waste.
    • Market. Relative distribution of channel-specific product sales trends to enable accurate forecasting of perishable raw materials and supplies.
  • Retail. Your retail outlets may not operate by the same rules as the manufacturing side, although there may be some overlap. Some of the strategic drivers for your retail business could include:
    • Labor costs. Labor efficiency in terms of sales vs. FTE relative to each hour and day.
    • Efficiency of employees. The scope of work assigned to working managers and the efficiency of retail store labor.
    • Market. Measure market fluctuations relative to the length of various holiday selling periods.

An Internet-Age Company’s Business Drivers

Now, let's take a look at a more modern business model. Specifically, a company that sells their products on Amazon, where Amazon stores and ships the items to the customer, called "Fulfilled by Amazon" (FBA). Amazon currently has more than 1.9 million sellers, 68% of which use the FBA option. So far in 2018, over 2,800 sellers have signed up to sell on the site each day! This is a competitive business, where just 7.3% of sellers (140,000) make over $100,000 in annual sales.

Assuming you have a privately-owned enterprise that wants to specialize in a certain area and grow, you will need to do several things. First, you will need to identify a unique niche in terms of products and the ability to leverage profits. Next, you need to set the appropriate goals for your business, so it both survives and grows in this crowded marketplace. 

Your business may have several goals. Among them are to grow your online sales quickly by taking advantage of trends and build brand awareness for any of the manufacturers you represent. You can work to accomplish these goals by choosing and monitoring the right business drivers. These include:

  • Real-time price management. Measure sell-through rates of SKU-specific inventory to determine this figure so that you can control inventory turnover rates and maximize revenue.
  • Inventory aging. Amazon charges to store stock on their shelves, so minimizing the age of inventory is a priority.
  • Average sales price. The average item purchase amount for products can help to accurately forecast the mix of Amazon charges which drive various margin measurements (gross, contribution, etc.).
  • Advertising spends. This figure can help determine the effectiveness of campaigns to drive SKU-specific sales.
  • Taxes. Sales tax in different states can impact sales, as well as business risks and costs. Several states are becoming extremely aggressive in their attempt to collect sales taxes from online sellers who do not have traditional nexus. Most companies do not understand their exposure.
  • Customer review and recommendations. These can have an almost immediate impact on the product- or brand-specific sales, depending on the review. These must be monitored and managed on a daily basis.

While you can make good profits with an FBA business, the right business model can produce soaring returns. One retailer quickly built an Amazon business that generates more than $160 million in annual sales.  

Comparing Business Drivers in Traditional and Internet-Age Businesses

There are several similarities and differences in the business drivers of these two industries. First, both the manufacturer and FBA business should be equally concerned with their market. If they are not producing a product or service that the end consumer will want and ultimately purchase, their efforts are wasted. They must also both be concerned with costs, such as the cost to hold inventory, even though the FBA is paying someone else for the warehousing and fulfillment costs.

An important difference between these two business environments lies in the labor business driver. The manufacturer must closely monitor their labor in all of their operations, while the FBA does not have this as a business factor. A manufacturer must not only find a balance between using overtime and FTE but also measure the efficiency of their employees and management. If an FBA does pay for labor, they are generally paying contractors or freelancers only for the services they need to advance the growth of their business.

A CFO's Perspective on Choosing and Leveraging Business Drivers

Not paying attention to tracking performance drivers can have devastating effects on a business. The shorter the business cycle, the greater the risk and importance of understanding what really drives business activity. When selling on a real-time platform like Amazon, prices and margins can fluctuate almost daily depending on sales velocities, customer preferences, and posted reviews of products and experiences. It is important to match the time period over which business drivers are monitored and managed to the business cycle a company operates in.

I encourage my clients to identify business drivers and track performance over a trailing 12-month basis so that they can develop and maintain a rolling 12- to 18-month operational forecast. This is especially important with a longer the sales cycle and when there is a longer the lead time for acquiring raw materials and supplies, particularly if those materials come from overseas or have limited shelf lives.

And, when selling perishable products, the shelf life of raw materials and finished goods is beyond critical. This again depends on the business cycle, as high-quality food products made with organically-grown and perishable ingredients without preservatives place significant importance on understanding sales trends and velocities to ensure that products are available to meet demand but not overproduced so as to create wastage.

The Importance of Using the Right Business Drivers

Business drivers are one of the ways that your company's leadership is challenged to successfully execute your strategic priorities. Once your organization's senior management identifies the most appropriate business drivers for your industry and company goals, you can begin to measure past performance to plan for future success.

At CFO Selections, we understand that choosing the right drivers may be easier said than done. Sometimes, a fresh set of eyes can bring a valuable perspective to your company's performance and opportunities for growth. Contact Kurt Maass here or CFO Selections here if you have questions or would like assistance using the analysis of your business' past performance to inform your decisions and improve your future results.

Related posts

Topics: Planning, Analysis, Financial Projections

Topics: Planning Analysis Financial Projections