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As all financial professionals know, the underlying purpose of every business enterprise is to create value for its customers, employees, and owners. This must happen year-in and year-out, or the company can become marginal and face serious problems. In today's fastpaced market environment driven by technology and the Internet, this risk has become magnified for those companies that remain wedded to yesterday's ideas and practices.
Take measurement, for example. Many of the financial metrics we work with today were developed nearly 100 years ago when business was conducted much more slowly. Yet issues of time and growth momentum, which these financial metrics fail to measure, are more critical than at any time in the past.
Only innovation in strategy and operations drives company growth-not money, plans, budgets, or schedules. And innovation occurs only through the competence, ideas, actions, and energies of a company's people, individually and collectively. One current measurement trend is to look at the "intellectual capital" of a business. That's important, but it's a static measure of potential performance. Operational dynamics-how people communicate, cooperate, and coordinate-is the more fundamental consideration in producing the innovation needed to keep a company strong in its marketplace. Understanding the forces-both good and bad-at work in a company's operational dynamics is the key to building growth momentum.
Traditional accounting reports are useful for external reporting, but they're woefully inadequate for guiding internal decision making that seeks growth in today's changing marketplace. I've developed what I call "Momentum Indicators, a new concept for guiding internal operations toward building company growth momentum. What are momentum indicators? They're a group of quantitative and qualitative metrics that measure a company's strategic and operational effectiveness in increasing its strength. They cover five areas: market position strength, organizational vitality, productivity gain, financial performance, and stakeholder value produced. The starting point in putting Momentum Indicators to work is a new metric, "Revenue Margin"(REM), which provides a quantitative look at market position strength for any company.
REVENUE MARGIN
Revenue margin is calculated by subtracting from gross margin all selling costs included in the SG&A line of a conventional generally accepted accounting principles (GAAP) income statement. It's the profit from a company's revenue generation system, and it's the only source for a company's operating profit.
The subtracted...