What’s your Critical Number?

I’ve received a couple of messages like this recently:

Ted, on the bottom of the annual and quarterly columns on the one-page strategic plan, there’s a space for critical numbers. Could you explain that further?

The concept of the critical number comes from Jack Stack and the Great Game of Business, celebrating its 20th anniversary this year.  While I’ve loved this book for a long time, after interacting with Jack at the Leadership Summit last May, I now can’t recommend the book highly enough if you’d like to learn more about open-book accounting and teaching your employees business fundamentals. Even if you’re not going to open things up, the critical number concept is powerful. Here’s what you do:

As your leadership team is thinking about the year or the quarter, after you set your financial goals, ask yourself, what one area of the business needs our attention this year or quarter? Is it a people issue, a strategy issue, an execution issue or a cash issue? What’s the one number, that if we were able to move that number, it would represent a tremendous improvement? That’s your critical number.

If you’re in an established business, one way to do this is to compare the items on your income statement and your balance sheet to your competitors or industry averages and see which number could make the most difference. For example, if you’re turning inventory 3 times per year while your industry or top competitors are turning 15 times per year, you can see what huge impact would come from working on that for a year.

Can you see how every area of the company could take meaningful action to address inventory turns? The big areas to address when thinking about inventory turns become your quarterly rocks or annual priorities.

If you’re a newer business and don’t have comparisons, just think about bottlenecks as they exist now. What’s limiting growth, customer satisfaction, repeat business, incoming referrals, employee satisfaction, recruiting, etc? Any area of the business that needs attention (and let’s be honest, they all need attention!) can be measured using a critical number.

Make sure your critical number is published prominently where everyone will see it, preferably in line of sight of everyone’s work station. Some companies even display their critical number where customers can see it. Make sure the number is updated often and that your weekly meetings are focused on how to move the number.

At the end of the quarter, celebrate your success if you’ve reached your goal!

In summary:
1. Decide which area of the business needs focus right now.
2. Pick a measurement that would represent major improvement.
3. Choose 3-5 priorities that allow the whole company to align around moving that number.
4. Celebrate!

I free up entrepreneurs for greater impact. Day to day demands of your growing business will sap your energy and blunt your effectiveness. Together we can work to reduce demands by up to 80% while moving more quickly in the direction of your purpose.

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