More to Measuring Than Meets the Eye
One of the most difficult decisions a business owner has to make is how to spend money to promote future growth. On the surface, the decision making process is straightforward. A good CEO allocates a portion of the company’s cash flow towards investing in growth initiatives. Generally, the level of capital that is dedicated towards these growth initiatives is based upon the expected return on the investment made (“ROI”). Most companies usually have a minimum ROI that is required to justify the risk associated with the investment, and CEOs choose between different options based upon their relative ROIs.
How do you measure the “return” on an investment? A basic accounting textbook will tell you that the ROI is a measurement of how much additional profit or cash flow your business makes off of the investment. For example, let’s say I choose to place an advertisement for my business in The Examiner. I can run a number of analyses that will show based on my previous experiences with print advertising, other local publications, etc., how many incremental customers I reasonably expect to get from the advertisement. Based upon the expected profitability of those new customers, I can calculate a range of expected ROIs and make an informed decision on whether to place the advertisement. While my assumptions may be wrong, I am at least making a reasonable effort to analyze the range of outcomes in order to make the best possible decision.
Sounds simple, right? Here’s where it gets a bit more complicated. Focusing on profit maximization too early in the development of your business may doom you to failure; or at the very least serve as a serious impediment to your growth. Some of the decisions that appear in the short run to be maximizing your profit actually lead to a long-term reduction in profits. Many entrepreneurs shy away from investments that don’t appear to directly increase their profits even though these investments are essential for developing a long-term platform for profitability.
Here’s an example from my own experience. When I first started my business, I spent far more than one dollar in marketing for each dollar of sales that I expected to generate. If I had measured ROI in terms of profits generated, I would never have made these investments, or at the very least would have stopped making them once I saw that their costs were exceeding the revenue that they were generating. However, I measured my return differently. My primary concern was to build market awareness for my service and establish a presence that would allow me to generate future sales. I made decisions regarding spending money not on whether there was a direct translation to profits, but rather towards my larger goal of building a business that would have long-term success and generate an overall profit level that would satisfy me.
Obviously, you can’t avoid ultimately focusing on profitability. For that reason, my measuring stick slowly evolved from the overall level of public awareness (i.e., the creation of a “buzz” about my business) to the number of meetings I had with prospective clients to the number of clients who purchased my services to my overall sales totals and then finally to my profitability. A long trip, but a necessary one.
It’s a little bit like trying to lose a significant amount of weight (again, speaking from personal experience). If your early focus is simply on losing as much weight as you can as quickly as possible, you may have some early success, but it is hard to sustain over time (been there, done that). If, however, you focus on making incremental changes to your life and measure your success based on how these changes improve your daily life and well being, it is quite likely that you will ultimately end up losing more weight (and increase the likelihood of maintaining the weight loss) than you would the other way. In my case, I didn’t step on a scale for the first four months, but I was able to tell you how much longer I was able to run between rest breaks.
By tailoring my measuring stick to my business’s current stage of development, I was ultimately able to get to the point where it became sensible to focus on the more traditional definition of ROI—an accomplishment that was almost as gratifying as being able to measure my weight loss success with an actual scale.
Adam Stark is the president of Stark Office Suites. Learn more about his business at www.starkofficesuites.com or call 914-428-0500.
Adam has worked in the local news industry for the past two decades in Westchester County and the broader Hudson Valley. Read more from Adam’s author bio here.