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It’s getting hard to choose the next business key terms. That said, we focused on general ones for business owners.

Business Key Terms, Part 2, let’s go!

“I don’t know the word ‘quit.’ Either I never did, or I have abolished it.” – Susan Butcher.

Key Performance Indicators:

Some metrics matter more than others: Key Performance Indicators (KPIs) measure crucial aspects of a system. It's easy to focus on easy-to-measure metrics rather than essential ones. 

Business KPIs often relate to the Five Parts of Every Business or Throughput. Here are some questions to identify KPIs:

Value Creation: How quickly is the system generating value? What are the current inflows?

Marketing: How many people are noticing your offer? How many prospects allow you to provide more information?

Sales: How many prospects turn into paying customers? What is the average customer lifetime value?

Value Delivery: How fast can you serve each customer? What is your current return or complaint rate?

Finance: What is your profit margin? How much buying power do you have? Are you financially stable?

Metrics related to these questions are likely KPIs. Limit yourself to 3-5 KPIs per system; more than this, you risk drowning in data.

P.S. - These questions represent the Five Parts of Every Business.

“It is better to have an approximate answer to the right question than an exact answer to the wrong question.” –John Tukey.

Throughput:

Throughput is the rate at which a system reaches its desired goal, measuring the efficiency of your value stream. Throughput is calculated as (units/time). More units produced per time increment mean higher Throughput.

To gauge Throughput, you need a clear objective:

Dollar throughput tracks how quickly your overall business generates a dollar of profit. Using a standard time unit like an hour, day, week, or month, determine how many dollars your business produces on average in that time.

Production throughput measures the time needed to create an additional unit for sale, from raw materials to a finished product.

If you don’t know your throughput, make it a priority to determine—measuring it is the first step to improvement.

“However beautiful the strategy, you should occasionally look at the results.” –Winston Churchill.

Return on Investment:

Return on Investment (ROI) measures the value gained from an investment of time or resources.

Typically, people consider ROI in monetary terms: if you invest $1,000 and earn $100 in profit, that’s a 10% ROI: ($1,000 + $100) / $1,000 = 1.10 = 10%. A 100% ROI means doubling your initial investment.

ROI’s relevance extends beyond money. You can apply it to other Universal Currencies as well. Evaluating the return on invested time is a useful way to assess the benefits of your effort.

Every ROI estimate is speculative—you can’t predict the outcome precisely.

Future ROI estimates are educated guesses. You can only know your ROI after the investment and returns are realized.

“Wise are those who learn that the bottom line doesn’t always have to be the top priority” –William A. Ward.

3 Universal Currencies:

Every negotiation involves 3 Universal Currencies: resources, time, and flexibility.

Resources are tangible assets like money, gold, etc. These are physical items you can hold.

Time is the second universal currency. When you work as an hourly employee, you trade a certain amount of time and effort for a certain amount of resources.

You can also exchange resources for time, paying others to work on your behalf.

Flexibility is the third universal currency and is often underrated. Being a salaried employee is a complex trade of resources that takes time and effort. While working, you sacrifice the flexibility to do other things.

You can acquire more of these desired currencies by making trade-offs between one or more of the others. For example, if you want additional compensation, you might trade time or flexibility.

Remember the 3 Universal Currencies when negotiating. You'll discover a wide range of potential options to present to the other party, making it easier to find a solution that works for everyone.

“Time will take your money, but money won’t buy time.” –James Taylor.

Gall’s Law:

To grasp systems, remember Gall’s Law: all functioning complex systems evolved from simpler, effective ones.

Complex systems contain numerous variables and dependencies that must align to operate. Designing intricate systems from the ground up will not work in reality because they have not undergone environmental selection pressures during creation.

Uncertainty means you can’t foresee all dependencies and variables in advance, causing a newly built complex system to fail unpredictably.

Gall’s Law connects environmental selection tests with system design. To create a functional system, start with a simple one that meets current environmental criteria and enhance it gradually over time.

“You do ill if you praise, but worse if you censure, what you do not understand.” –Leonardo Da Vinci.

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Last thoughts:

I hope these business key terms, concepts, and example situations are helpful to you in whatever stage of business and as an entrepreneur.

-> Open your eyes and ears to spot situations where you can interact with others. And practice, practice, practice.

See you in a week.

Your Zine.