While successfully turning around a family business and relying on a COO for operations I was asked many times, “How was I able to tell if the COO was doing a good job?” It may seem like a simple question but, for entrepreneurs that have started their businesses and led the charge ahead largely by intuition, it is hard to imagine holding someone else responsible for the day to day well-being of the business. The answer I gave them, of course, had several dimensions. Yet, there were always a few top things that came to mind and this story is about one of those.
For many years I was a member of TEC (The Executive Committee) which has since changed its name to Vistage Worldwide, Inc. One of the many monthly speakers we had the honor to hear was a person by the name of Kraig Kramers. He passed away on October 5th, 2014 and his legend lives on at ceotools.com. There was one tool he had in his kit that I relied on heavily — literally ever since first hearing him talk about it — and that tool is the concept of always looking at the business in a trailing 12 month analysis.
What does a trailing 12 month analysis mean? It means for every month that passes look at it as a year end. It means adding up the previous 12 months of data and taking that result as the point in time to graph trends and comparisons from. The result of this is taking all annual seasonality out of the equation (remember, every single data point has the full 12 months of history in it now) and it throws out the window of needing to compare this month to the same month of the previous year or this quarter to the same quarter of the previous year. Month to month data is usually too volatile to be meaningful and waiting for an actual year end to celebrate or, worse yet, plan corrective action, is insanity.
Once you have a trailing 12 month financial package up and running you can, of course, look at whatever you wish for those numbers — such as current ratio, debt to equity, quick ratio, days to pay suppliers, inventory turnover, return on equity, %SG&A, Altman Z-score, etc.
The above chart is actual data from a business I used to be responsible for. The income before tax line looks troublesome in the late summer of 2004 but taken with the known changes in the business at that time it was something still to be monitored yet easily explained as “normal”. Imagine trying to compare that data just looking back a year for each individual month? There would be a complete disconnect and no rational way to relate it to the larger picture.
In summary, why wait for a year to end to understand, and react, to macro changes in your business? Implement the mindset of trailing 12 month analysis to see those results every month. For some, reading this story might be all that is needed to be off and running. For those who are interested and still confused you can refer back to the book or the website for further clarity and more ideas, plus sample spreadsheets, to make the success of running a business more measurable.
I receive no benefit in pointing you to Kraig’s website. I am simply glad to see his ideas live on past the life of the man himself. He greatly helped me understand the heartbeat of a business from turnaround to a success far greater than it ever saw in its entire history. Whether you rely on a COO, or if you are playing both the COO/CEO roles at once, this simple tool might just make the understanding of where you business is going a lot deeper than it ever was before.
(Originally posted on Medium)