'People support what they help create.' - Jack Stack, Chairman, SRC Holdings.
When my CFO released the financial reports each month, I poured over them with great interest and curiosity. I wanted to know what the numbers were telling me, whether we were favorable or unfavorable to plan, how much profit we earned on our revenue for the period, and how much cash we were able to generate to help fund initiatives we had set out to accomplish to scale the business.
I carefully compared results period over period, and the year to date to the prior year to date. The results were either acceptable or not, and if not, I would task my team to research why and come back with answers. This was my pattern, and while I thought I really knew what was happening in my company, the reality was that I didn't. My process meant that I would always be too late to make any sort of meaningful difference. I was reviewing historical (albeit recent) numbers; however, they were still historical.
Numbers are everywhere, and leaders use them in tracking progress and making important decisions. The problem is identifying which numbers are critical. Take baseball for example. Just enter a name, such as the great pitcher Mariano Rivera, who just recently received the Presidential Medal of Freedom. Entering his name into the tracking site: www.baseballreference.com reveals a spreadsheet which includes 35 columns of data categories across 19 rows, with each row representing a year in the major leagues. Mr. Rivera started with the New York Yankees at age 25, and stopped at age 43, playing his entire career with that one team.
This at-a-glance spreadsheet includes no less than 665 data points, and a vast number of comparators, and all this for just one player. That is a lot of data. But which data points are most important, and who would care? I like to look at wins vs. losses, and the earned run average (ERA), but I am not the coach. The coach many need all 665 entries, but which numbers are the most critical?
Business is no different. As a leader, you have at your fingertips a plethora of data including financial, marketplace, operational, human, and administrative that can help you keep tabs on your business. You can read publications like The Wall Street Journal, Barron’s, Investor’s Business Daily to name a few, that have data on every company listed on multiple stock exchanges. You can purchase enormous quantities of data if you need specific types, but one thing is true about all the data you can access ... it is all historical. Every data point you access represents something that has happened in the past. Every number on your financial statements, your Profit and Loss and Balance Sheet, your Statement of Cash Flow, is a lagging indicator, an effect that certainly has a cause, but is nevertheless a historical number.
With so much information, we tend to lose focus, and miss critical marketplace or operational trends that we should be paying attention to. These trends might have been spotted had we been focused, real time, on a specific number. The challenge is that there are so many data points that it is difficult to get employees to focus on or even care about where they come from and what they mean. Getting your employees engaged in the “business of running the business” will help you enormously as you scale the company. But, first, you must identify the one Critical Number that everyone must be laser-focused on.
What is the critical number and how do I identify it?
I like to think of the Critical Number as the One Number that represents the most important variable we have to get right in order for our organization to succeed. Many think of that one number in financial terms, such as profit before tax (PBT). It might be thought of in human terms, such as finding and retaining talented people in these strong economic times where unemployment is below 4% in most parts of the country.
At The Great Game of Business, the Critical Number is defined as an 'operational or financial number that represents a weakness or vulnerability that – if not addressed and corrected – will negatively impact the overall performance and long-term security of the business.' For more on Critical Number, go to their recent blog at the Great Game of Business titled 'Four Characteristics of a Strong Critical Number.'
Once defined, we then need to forecast it along with the associated drivers, so we have clarity about how our company is performing at all times, in all departments, with all employees fully engaged and working to improve.
A great way to engage your people is to connect the data to a benefit such as a bonus, a reward, or even equity in the form of stock or stock options. Remember that if you engage your people through education, teaching them about the business of running a business, and including them in a reward system, they will become more interested in shaping the numbers in a way that benefits the company, and increases the reward.
Before we do that, we need to teach our people about business, about finance and accounting, and how we can influence the Critical Number by focusing on the drivers to that number. You might think that to be an impossible task, but if you really want to get great results, teach your people the rules of the business, educate them, and then provide them with a stake in the outcome, and you will be amazed at what they can and will accomplish.
Want more? Here’s a couple more resources to investigate:
ARTICLE: [2 min read] What's my Critical Number and Why Do I Need It?
There is at least one financial or operational number in your company that, if clearly understood and improved in the short term, would have a dramatic effect on your business. What is that number for your enterprise? Your Critical Number will change depending on market conditions and strategic goals.
By engaging your team in the process of focusing on the Critical Number, they will become far more engaged and focused on the top priorities. They will have a common goal to target and collaborate with others to achieve. They will also become educated about the factors that drive the business forward, and what it takes to be successful. They will, critically, have a chance to improve their own lives, and their families’ lives, in the process.
BOOK: Get In The Game: How To Create Rapid Financial Results And Lasting Cultural Change, by Rich Armstrong and Steve Baker
Due to be released on October 1, 2019, Get in the Game outlines the 10 main steps to implement the Great Game of Business framework. I especially like the goal of the Great Game of Business, which is about transforming lives for the better by giving people the opportunity and tools to build better lives for themselves, their families, and their communities - empowering people to pursue their dreams.
It starts with the right leadership and understanding the WHY behind open book management (OBM). Getting employees engaged and passionate about the Game involves a real commitment to developing relevant knowledge of financial terms, what they mean and how they are used. The authors further describe the path to determining your critical number, and help you develop a focus on the drivers to that number. I highly recommend reading this new book.
