A version of this article first appeared on EideBailly.com.
Family-owned businesses contribute substantial economic benefit, providing 64% of the GDP and employing 62% of the workforce. This isn’t without reason — these businesses often possess unique qualities that make them strong candidates for future growth and success.
Deep loyalty to family members helps ensure a steadfast commitment to a lasting legacy. In addition, their agility and quick decision-making capabilities allow for adaptability in dynamic markets and foster a spirit of innovation.
Yet, for all their strengths, family businesses struggle in one crucial area: succession.
Why Succession Remains a Challenge for Family-Owned Businesses
According to the Conway Center for Family Business, fewer than 30% of all family-owned businesses transition to the second generation, and when it comes to the third generation, only 12% succeed. By the fourth generation, only 3% will still be operating as a next-generation family business.
The relationships that bind family members can intensify a variety of business issues, creating a complex interplay of personal and professional dynamics. Additionally, the emotional investment in the business can sometimes lead to difficulty in objectively evaluating performance or making tough decisions that are in the best interest of the company.
How can family-owned businesses address and navigate these emotional challenges so that they don’t affect the transition? The answer might be as simple as turning to the numbers.
Utilizing KPIs to Drive Family Business Decisions
KPIs provide quantifiable measurements of success for businesses. Through monitoring current actions, organizations can make the necessary adjustments to empower teams and prioritize strategic objectives.
In the context of decision-making, KPIs allow family businesses to make informed choices backed by concrete performance metrics rather than relying on intuition or subjective assessments — like existing relationships with family members.
Other ways in which KPIs aid in transition planning include:
Alignment: KPIs provide clarity on where your organization is headed, aligning everyone with the company’s vision and direction. As a result, decisions become anchored in the pursuit of predefined objectives rather than being swayed by personal preferences or emotional considerations. This logical perspective allows for a comprehensive understanding of what is working and what isn’t, leading to more informed business decisions.
Accountability: The introduction of KPIs fosters a culture of accountability within the family business. When performance metrics are transparent and regularly reviewed, each family member’s contributions and responsibilities become clearly defined. This accountability ensures that decisions are made with a focus on shared goals and objectives, minimizing potential conflicts arising from perceived favoritism or unequal contributions.
Guidance: KPIs provide a common language for communication within the family business. Instead of relying on subjective interpretations of performance, family members can engage in discussions grounded in the shared understanding of data. This facilitates more effective communication, reducing misunderstandings and fostering a collaborative atmosphere where decisions are based on facts rather than emotions.
The Most Effective KPIs for Measurement
Keep in mind that the most effective KPIs will depend on what success means for yourorganization. Whether it’s improving profitability, increasing customer satisfaction, or optimizing operational efficiency, KPIs should align with these overarching goals.
There’s also not one single KPI that can provide all the answers you need. Rather, a combination of meaningful KPIs tailored to your organization’s needs is essential to fueling your decision-making and strategies.
Examples of strategic KPIs for family businesses include:
Financial Performance
- Current Ratio: A measure of liquidity, calculated by dividing current assets by current liabilities. Higher ratios indicate better liquidity.
- Total Asset Turnover: Reveals how efficiently your organization utilizes assets by dividing sales by total assets. Higher ratios indicate more effective asset utilization.
- Days Sales Outstanding: Measures the average time to collect receivables from customers.
- Days Payable Outstanding: Measures the average time to pay vendors.
- Days Cash on Hand: Reflects how long your organization can survive without revenue while meeting operating expenses.
Non-Financial Performance
- Sales and Customer Metrics: Includes metrics like new customers, repeat sales, customer retention, and collection effectiveness.
- Marketing Metrics: Includes metrics like website visits, social media engagement, and return on marketing investment.
- Market Share: Calculates the business’s share in the total market, indicating competitiveness.
Some of the most effective KPIs blend financial and non-financial data. These metrics are tailored to your industry and organization, such as charge hours in accounting or sales per square foot in retail.
Many KPI’s can be created from the questions that keep you up at night. Consider the following:
- If you are worried about cash and meeting current obligations, track days cash on hand and/or quick ratio.
- If you have significant investments in equipment or other long-term assets, track asset turnover ratio and/or return on investment.
- If you are spending significant dollars on sales reps and/or marketing, track cost per customer acquisition.
- If you have a steady customer base and are looking to grow revenue with additional services/products, track sales per customer.
- If you are struggling with recruiting and maintaining high quality employees, track employee turnover rate.
- If you are facing challenges with quality control and/or customer returns, track error rate.
Succession Planning as a Business-Building Endeavor
Achieving generational success requires an intentional investment in both the business itself and the family relationships that accompany it.
Establishing clear lines of communication, setting measurable KPIs, training interested family members, and creating a succession plan that outlines roles, responsibilities, and timelines for the transition of leadership all play pivotal roles. These strategic steps pave the way for a successful leadership transition and an enduring legacy.
The good news is you don’t have to do it alone. Learn more about Eide Bailly’s specialized solutions for family-owned businesses here.
From Our Partner
Family Business Sponsored Content
This content is made possible by our partner and is independent of Family Business Magazine’s Editorial Staff