Business failure isn’t a sudden event.
Minnesota business leaders need to focus on accurate performance indicators to ensure long-term success.
Florida: December 29th, 1972
Eastern Airlines Flight 401 was a routine flight traveling from JFK Airport to Miami. As the pilots engaged the landing gear they noticed that one of the plane’s three indicator lights failed to turn on.
Not knowing whether the light was burned out or whether the landing gear had failed to lock in place, the two pilots and flight engineer focused on solving the problem.
They tried unsuccessfully to reengage the landing gear and then sent the flight engineer down below to see if he could do a visual check from a small window in the plane’s nose.
The three were so focused on fixing the problem that they failed to notice that one of them had nudged the plane’s control column with his knee, which disengaged the autopilot and sent the plane into an “imperceptible descent.”
The pilots had taken their eye off the plane’s dashboard, which had several indicators to show they were losing altitude and were in peril.
At 11:42 p.m. Flight 401 slammed into the everglades at 244 mph, killing 101 people.
How Minnesota business executives can avoid imperceptible descent
The crash of Flight 401 is not simply a tale of a blundering flight crew. The majority of business crises arise due to a similar misplacement of focus at the executive level that causes a company to slip into a disastrous imperceptible descent.
Business speaker Mike Richardson (Author of Wheelspin) recently led a discussion on imperceptible descent at my Vistage CEO Peer Advisory Group meetings, and impressed upon us the importance of keeping our eyes on the horizon and key business indicators.
In our next meeting, Vistage speaker Kraig Kramers made a compelling case that the monthly and year-to-date financial reports that most companies rely on do not give an accurate picture of what is truly happening in a business.
Financial reports typically do not control for varying month lengths and how weekends or holidays fall in a given year. This means that there could be 20% more business days from one February to the next, making for an inaccurate comparison.
The solution is to replace the typical monthly financial spreadsheets with trailing twelve month charts which plot the moving 12 month totals or averages for your key indicators.
These eliminate the “noise” caused by random monthly variation and give you a true picture of what is happening in your business (up is good, down is bad).
What business performance measures are important?
Key performance measures for a business will vary by industry. Kraig Kramers recommends starting with five fundamental measures that apply to all businesses:
- What causes sales (WCS)
- Sales growth
- Gross margin
- Operating expense net of WCS
- Operating profit
Chart these measures on a single page to get a true picture of whether your business is experiencing an imperceptible decline.
The task may appear daunting initially, but the good news is that business leaders do not have to reinvent the wheel – a spreadsheet version of this chart is available online.
The spreadsheet that Kraig provides also includes several tips to ensure that you get the most value out of it.
The members of my Vistage Peer Advisory Group have found these performance measures helpful in recalibrating how they evaluate the performance of their companies.
Brian L. Davis is the leading Vistage Chair in the Twin Cities. Learn more about his Vistage member companies here.CEO Peer Advisory Groups, Peer Groups, Vistage Peer Groups