Business metrics: Measure the right things

A colleague of mine who is anal retentive passionate about his business metrics had recently revamped his metrics for 2010. And now that we’re nearly a month in, I asked him how it was going and he sheepishly admitted that he had overlooked one particular metric and wasn’t getting the right picture of his business. He made some changes and, going forward, he’s adjusted his business metrics to include all of the key components he wants to measure.

I don’t hear that kind of thing often enough in business – too many business owners just add up revenue for the day and hope that it covers their bills.

Right after talking to my colleague about his incorrect and newly corrected metric, I found this article which I thought was appropriate to him… and perhaps to you. It’s published at Money.CNN.com and is called “EVA Momentum: A New Way to Valuate Companies“.

In the article, they highlight how the executives at the now-dead Lehman Brothers were so focused on Return On Equity (ROE) that they made bad decisions but never fully understood the implications of those decisions because they weren’t impacting the numbers. And, the article goes on to say that this is common with other businesses that focus too much on other metric like gross margin or earnings per share (EPS). Then the article puts forward a new metric that it says is bulletproof and potentially the best metric that investors can use to analyze a business (and businesses can use to analyze themselves).

Before I get to the metric itself, let me say a couple of points of clarification: I’m sure that the executives at Lehman Brothers may have been focused on ROE but still made risky decisions and knew they were doing so. Also, I’m sure that this “bulletproof” metric might be really good but we may eventually discover that it is not as magical as we thought it was.

Okay, so here’s the metric: It’s called EVA Momentum. EVA stands for Economic Value Added and it is basically a company’s profit after deducting all the capital in the business. EVA Momentum measures the change in a company’s EVA divided by the prior period’s sales. Read the article for a nice clear example.

I realize that this might be pretty specialized for some users, but for others, it could be the metric you’ve been looking for to rate the health of your company (or your investments).

Think about it and let me know your reactions.

Jessica Routier, IAC-EZ

Tax breaks, tax deductions, and glorious tax minimization!

There are lots of tax breaks out there, but you need to know how to find them. In this blog, we’ve collected together a few top tax breaks (and some unusual ones) that we think you might like. They might not all be usable for the tax forms that you’ve been writing but keep these in mind and use them this year.

In this blog by CPA James Maertin, he lists a number of really useful tax breaks for a number of situations. Not all of these will apply to you, but some might!  Read: “List of Tax Deductions.” Oh, and be sure to scroll down to check out his list of expenses that cannot be deducted.

Here’s a list from AllBusiness.com listing “Top 10 Tax Tips for Small and Growing Businesses.”

Forbes produced this list of “Last Minute Small Business Tax Tips”. It’s from several months ago but it’s still relevant, and you might want to apply some of these to your business practices this year to get the tax benefit at the end of 2010. Read it here.

And here’s an article from CNN Money called “Small Business Tax Tips: How to Keep More Cash.”

I thought you might also like this contrarian point of view that looks at five tax deductions many people enjoy but highlights why they aren’t as good as some might think. Read the blog at SmartMoney.com.

And for all of you small business owners out there (that’s basically all of the readers on this blog), here is a list of some of the IRS’ changes to the small business tax code for this year.

- Jessica Routier, IAC-EZ