Improve your organization, Incrementally! Part 1

A popular book over recent years is Atomic Habits by James Clear where individuals, teams, and organizations can dramatically change their lives through the daily implementation of small habits. One example Clear provides early in the book is the British Cycling Team and how they address every minute detail of the biking experience by identifying, measuring, and constantly improving it. The practice of addressing these 'Atomic Habits' resulted in Britain possessing the dominant cycling team of the 2010s. As Clear notes in his book, such systems allow parties to get '1% better every day'.

Such a system can be implemented for your small business. While teaching Entrepreneurial Management at the Wisconsin School of Business, the principle of managing for incremental improvement in small business that Professors Alan Filley and Bob Pricer taught for decades. The starting point is to develop a metric/ratio that can be the foundation to measure that incremental improvement.

Jack Stack, retired CEO of Springfield Manufacturing and author of the famous book, 'The Great Game of Business' on the turnaround story at Springfield, suggested one of the important principles they followed in their turnaround was identification of the Critical Number concept.

The Critical Number is further discussed here LINK. In most experiences, small businesses have a tough time identifying where to start. As a default, I highly recommend the Return on Asset Investment or ROAI ratio as a starting critical number to focus as the starting point for a Critical Number and development of Incremental Improvement management.

Why ROAI?

The ROAI metric is an important financial measurement for several major reasons: 1) the numerator is comprised of Operating Earnings or EBIT (Earnings before Interest and Taxes). EBIT represents an important indicator of how your operations are doing before including financing policy (interest) and tax policy (Income Taxes), 2) Assets Invested, as the denominator, integrates all financial capital as investment in the firm, not just debt or equity. It also includes both short-term and long-term interest-bearing debt. Third, it is compared to a clear benchmark, Cost of Debt, or the average interest rate the firm pays on its debt. As noted in previous posts, the goal is for the ROAI to exceed the Cost of Debt by at least two percentage points. (e.g., ROAI of 12%, the Cost of Debt must be 10% or lower).

In future posts, I'll break down individual components of ROAI that can be easily linked to operations and how firms can develop incremental steps over time to improve ROAI.