In any entrepreneurial endeavour you are faced with decisions every day – big decisions with big consequences. Should you hire more people, should you make a change to your product, should you invest in your systems? Every decision you make will have a direct impact on the growth you can achieve and the sustainability of your business for the future.
But it is impossible to make the right call every time. You will make mistakes.
So given this, how do you ensure you are learning from your mistakes, heading in the right direction and making progress in your business?
The answer lies in Innovation Accounting – taking a disciplined systematic approach to measuring the impact of your decisions against your business plan.
What is Innovation Accounting?
The concept of Innovation Accounting comes from one of my favourite books of the last few years called The Lean Startup by Eric Ries.
But it is impossible to make the right call every time. You will make mistakes.
So given this, how do you ensure you are learning from your mistakes, heading in the right direction and making progress in your business?
The answer lies in Innovation Accounting – taking a disciplined systematic approach to measuring the impact of your decisions against your business plan.
What is Innovation Accounting?
The concept of Innovation Accounting comes from one of my favourite books of the last few years called The Lean Startup by Eric Ries.
The basic contention of the book is that constant innovation and iteration are the best ways to create successful and sustainable businesses. In other words experiment as much as you can to learn what works best for your business.
However, constantly meddling with your business can be counter-productive if you fail to learn the lessons from each and every tweak you make. Only if you really understand the impact of changes you make will you know which were right and which were wrong, which set the business back and which propelled it forward.
This is where accounting comes in.
People generally think of accounting as dry and boring, all about annual financial statements and tax filings. But the real value of accounting is as a framework to consistently and systematically measure business performance. With today’s tools and technology this can increasingly be done dynamically in real-time, delivering insights and learnings back to entrepreneurs quicker and more effectively than ever before.
Using accounting in this way propels businesses forward to test, experiment, ideate, learn and develop in a constant cycle of improvement. This is Innovation Accounting.
However, constantly meddling with your business can be counter-productive if you fail to learn the lessons from each and every tweak you make. Only if you really understand the impact of changes you make will you know which were right and which were wrong, which set the business back and which propelled it forward.
This is where accounting comes in.
People generally think of accounting as dry and boring, all about annual financial statements and tax filings. But the real value of accounting is as a framework to consistently and systematically measure business performance. With today’s tools and technology this can increasingly be done dynamically in real-time, delivering insights and learnings back to entrepreneurs quicker and more effectively than ever before.
Using accounting in this way propels businesses forward to test, experiment, ideate, learn and develop in a constant cycle of improvement. This is Innovation Accounting.
How do I start Innovation Accounting?
Software such as Xero provides a great platform for real-time monitoring of key financial metrics, whilst services such as Google Analytics are an incredible engine to measure and test the digital drivers of your business. These days cost-effective, easy-to-use accounting tools are readily available to businesses of all shapes and sizes.
But creating the technical architecture to deliver Innovation Accounting is the easy part.
Before you can start properly leveraging the power of this technique you need to confront two big questions. Answering them thoughtfully is the key to successfully adopting Innovation Accounting in your business.
First, what should I be measuring? And second, what results do I want to see?
For the answers to both questions look back at your original business plan and model. That model provides assumptions about what the business will look like at a successful time in the future. If it was thoroughly thought through, it will also indicate what the key drivers of business growth are.
Let’s take a simple business selling hand-made Christmas decorations online as an example. The business plan calls for the profits from sales of goods to be reinvested in marketing and promotions, in order to gain new customers and drive growth.
In that model the rate of growth depends on three key metrics: the profitability of each customer, the cost of acquiring new customers, and the repeat purchase rate of existing customers. If these three metrics are improving the business is improving.
If the business is well set up to measure and track these three inputs it can easily follow how decisions impact the long-term base-line of average performance, and also track how much progress is being made towards the ideal-state original business plan. Completing this exercise systematically provides an authoritative and objective evaluation of progress.
Innovation Accounting is a really powerful tool. To successfully apply it to your business you first need to carefully measure and track the impact of your decisions on the drivers of growth, and secondly review how the metrics around those drivers compare to both your base-line performance and original business plan. If you can successfully build this process into your business operations you are in great shape to grow.
Software such as Xero provides a great platform for real-time monitoring of key financial metrics, whilst services such as Google Analytics are an incredible engine to measure and test the digital drivers of your business. These days cost-effective, easy-to-use accounting tools are readily available to businesses of all shapes and sizes.
But creating the technical architecture to deliver Innovation Accounting is the easy part.
Before you can start properly leveraging the power of this technique you need to confront two big questions. Answering them thoughtfully is the key to successfully adopting Innovation Accounting in your business.
First, what should I be measuring? And second, what results do I want to see?
For the answers to both questions look back at your original business plan and model. That model provides assumptions about what the business will look like at a successful time in the future. If it was thoroughly thought through, it will also indicate what the key drivers of business growth are.
Let’s take a simple business selling hand-made Christmas decorations online as an example. The business plan calls for the profits from sales of goods to be reinvested in marketing and promotions, in order to gain new customers and drive growth.
In that model the rate of growth depends on three key metrics: the profitability of each customer, the cost of acquiring new customers, and the repeat purchase rate of existing customers. If these three metrics are improving the business is improving.
If the business is well set up to measure and track these three inputs it can easily follow how decisions impact the long-term base-line of average performance, and also track how much progress is being made towards the ideal-state original business plan. Completing this exercise systematically provides an authoritative and objective evaluation of progress.
Innovation Accounting is a really powerful tool. To successfully apply it to your business you first need to carefully measure and track the impact of your decisions on the drivers of growth, and secondly review how the metrics around those drivers compare to both your base-line performance and original business plan. If you can successfully build this process into your business operations you are in great shape to grow.
Our advice: a disciplined and systematic data-led approach is the most effective way of objectively assessing the success or failure of your business decisions. Whether through Innovation Accounting or more traditional Management Accounting techniques, make sure you have carefully considered how you measure and track your business and take the time to learn from the insights your measurements reveal.
The concepts in this post are primarily derived from the book ‘The Lean Start Up’ by Eric Ries. It is essential reading for any entrepreneurs and is available on Amazon here.
Venta Partners can advise on and implement Innovation Accounting techniques in your business or start-up. We can support you to measure the right things at the right time, helping you learn as fast as possible to deliver sustainable business growth. Contact us today for an introductory discussion.
Venta Partners can advise on and implement Innovation Accounting techniques in your business or start-up. We can support you to measure the right things at the right time, helping you learn as fast as possible to deliver sustainable business growth. Contact us today for an introductory discussion.
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