Are you measuring the right metrics?

I happened to meet one of my friends who has been in the construction business for a while. He is really passionate about his work and surviving amid tough competition in the locality. I asked him about how the business is going. He said it’s going well. Out of curiosity, I asked him how do you measure his performance? He thought for some time and managed to answer me that it is his business growth. In a matter of last three years, he was able to grow his revenue double the time. It’s a great achievement indeed. But, I asked another question. “In that case, your cash in the bank would be doubled at least isn’t it?”. He was silent for some time and tell me with hesitation “Nope”. He indeed has a problem paying his vendors on time as well as having a huge cash crunch.

So does it make sense to measure the performance of a company with revenue? Some people might say it is operating profit or return on investment. All these measures will really help us to arrive at a conclusion. But, is it makes sense? The theory of constraints explains that the real measure of enterprise growth is money (cash in the bank). All other figures can be manipulated by a financial guy the way management expects (at least to some extent).

It is not his lack of knowledge, but sometimes the true measurement hurts because it is difficult to achieve. However, having the commitment to measure it right once can change the way a business performs.

The goal of any business is to make more money now as well as in the future.