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Business Metrics – Building Targets into Your Lease

The saying goes “what you don’t measure, you can’t manage” Having a business plan is status quo. Everyone needs one to plan and obtain their targets and goals. One vastly overlooked aspect of a business plan is metrics. Its not just a buzzword, but your business plan laid out financially, with a set of rules about what is acceptable and what is not.

Having a business plan works great when things are going as they should, much the same way you planned in your model. You can look back and see if you are on target to meet your goals, or if you need to make a pivot. They serve many different purposes such as setting values, identity, marketing approach, customer generation, retention, process and execution as they are meant to provide a path to success.

However, metrics are used very little in aiding all the attributes and goals of your business plan. What are metrics? They are a set of rules or objectives that are used to measure your success or failure, usually based upon past performance and compared against your industries key performance indicators (KPI’s). Depending on what industry you are in your KPI’s change.

KPI’s are relative targets seen as a percentage of your gross revenue. For example, most business’ want to fall in the range of 5-10% for rent. If you are grossing $1,000,000 a year, you want to be paying a maximum of $100,000 in rent using these metrics. The exercise in analyzing your business metrics allows you to be adaptable so you can change your business plan to meet your performance goals. There are ways of controlling your performance when your KPI’s don’t seem at align with your industries KPI’s. Having professionals use your KPI’s gets results as it provides real targets for them to use. KPI’s produce strong budgeting because it is relative to your revenue and business performance rather than an arbitrary number set out, giving you confidence in your decision making. In the case of site selection and your lease thereof, if you plan your KPI’s correctly, professional fees pay for themselves with real savings and rewards.

Fixing your rental payments as a KPI can be tough. You are in a Lease with set out rents into the future and there isn’t much you can do to adjust them. Increasing sales to bring your rent metric down to a comfortable level is usually within your control so most business’ start there. You set out to increase your marketing budget and therefor increasing you KPI in that category. The goal is that it lessens your rent metric through increased revenue, and if your strategy works, at a greater return than the increase in your cost metrics. The other route is to minimize your other KPI’s such a labour, marketing, and cost of good sold. These avenues can be rewarding if they work, and thus creating a positive change to your business plan.

The most solid route is to set your metrics before you make a big move like committing to a long-term lease. You need to be able to predict how much revenue you will be receiving in order to know what you should be paying for rent. If you are a new business owner looking to lease space, this can be difficult to predict. Knowing what you can afford at the outset can help you in your negotiation in a lease as you can set upper limits to what your business can handle. It can help you not get stuck on a space you desire where rental amounts are not going to work for you or, continue with a space that is financially suitable. It can predict what rental increases you can handle throughout your lease in tandem with your revenue long term so you can plan accordingly. It is possible you will need to revise your revenue generation to meet the rents of your desired space.

Setting your rent well within your industry KPI over your lease term gives you a predictability that you can handle the ups and downs of the markets. Picking the right location for your business is important. Not all buildings have the same price tag. Often rent and marketing are reciprocal in that a good location and exposure can lessen your marketing metric but increases your rent metric. Knowing this concept with site selection is powerful in the planning department.

No one knows your business better than you do. When you plan properly, your lease can become an asset to your business rather than a hinderance. Setting your KPI metric such as rent helps third party business professionals work efficiently for you. Putting their expertise to work within your metrics, or perhaps helping to achieve them is in your best interest. Hiring a professional may increase your professional fees metric but can have a larger cost savings effect by lessening other harder to control KPI’s such as rent. How much rent you pay is important in that you don’t negatively impact your other KPI’s. The higher your rent KPI is, the more likely it will impact all your other KPI’s as a percentage of revenue in a negative way.

Keep planning and revising; stay up to date with the KPI’s of your industry. Consult with someone to make sure you are right and change your business plan accordingly if need be. It should be adaptable and not stagnant, and metrics allows you to do so in real time, with real numbers in your dynamic model.

Written by
Ian D. Toms