Hurray! Lucky for everyone out there, I have coined a new acronym. I call it ABVs: action-based variables. This is a great thing for the future of business owners, but consultants may have some mixed feelings about this. While consultants can rejoice in having another fancy acronym to sound authoritative and confuse their clients with, they will have to actually do some real analysis to come up with what these ABVs are (I still can’t get over how fancy I am!). This is because they will be different for every business, as each business has unique actions. KPIs—that is, key performance indicators—are usually rules of thumb being pulled directly from the trendy convention of the day that are applied quite generally as a metric to arbitrarily strive towards.  Business owners can finally stop trying to decipher consultant-speak (who get paid by the hour and must talk in acronyms to save precious time) and can finally get measurable results, directly showing how their actions are either putting money in their pocket—or draining it. This post aims to destroy the conventional wisdom of the KPI and to show how a less lazy, more precise analysis can leave business owners with more clarity about how their actions impact their cash flows, so they can make profit-maximizing decisions. So, what exactly is an action-based variable? (I promise not to use any more acronyms.) Using mathematical techniques—which is essentially just algebra—every business can be broken down into the variables that determine its cash flows. Your business is, for the most part, consisting of these general components, each of which combine to determine how cash is created (or destroyed) by your business: Customer acquisition  Operations  General administration  Financing  Each of these components can be broken down further and further into its constituent components until we get to the solid, concrete actions that they are based on. These are what I have coined action-based variables. By understanding our ABVs (sorry, I couldn’t help myself) , we can directly see how improving these specific actions creates improvements in our cash flows. By modeling out your business, using your actions as variables within each of the components, and then putting all the pieces together—creating a bottom-up financial model—we can identify the most sensitive action-based variables and focus our strategies and efforts on improving those specific actions to maximize profit. This is much simpler for business owners to understand and execute—though not nearly as simple for consultants.  KPIs vs ABVs: Why KPIs fall short I’ll delve deeper into how to come up with these action-based variables shortly, but first I promised to destroy the conventional wisdom myth of the KPI. I’ll do this by showing you that they are actually—if you dig deeper—based on action-based variables. KPIs alone, however, don’t show you the whole picture and are often based on some kind of industry standard, trend, or rule of thumb, rather than focusing on what your specific company does. Let’s use a simple fictitious example: Meet: All Scream For Ice Cream They sell ice cream wholesale to stores via online channels and outbound sales, and also have their own brick-and-mortar shops that rely on local foot traffic and newspaper ads. Your average consultant might say something like: “Your CLTV must be 3x higher than your CAC.” (Translation: the lifetime value of a customer must be 3x higher than the cost to acquire them.) Let’s break that down further. Customer Lifetime Value (CLTV) = Average Value of Sale × Number of Transactions × Retention Period × Profit Margin Customer Acquisition Cost (CAC) = (Total Marketing + Sales Spend) ÷ # of New Customers Acquired Now, say the CLTV at All Scream for Ice Cream is 2.5x CAC—short of the arbitrary “3x” target. Does that alone help you decide what to do next?  Saying, “increase your average sale value!” is about as helpful as a basketball coach yelling, “go score more than the other team!” Not to mention, metrics like these don’t even properly distinguish between fixed, variable, and sunk costs. Instead, we need to break these down further into action-based variables so that an entrepreneur can actually understand how to create a profit maximizing strategy. How to Break Down KPIs into Action-Based Variables Each variable—like CLTV or CAC—can be broken down into multiple layers of detail. But your goal is to get to a level of granularity that’s actionable. If this is a new endeavour without any data to be collected a more general metric would be better for accurate forecasting, in our example, for wholesale ice cream you could research the number of stores in your target market then your action based variables would be the percentage of reach, another percentage for conversion, and then average price of sale. Improving any of these will improve your profit revenue, and likely your profit. We’d need the whole bottom-up financial model to really know. If you are already a running business and you have data and you understand your processes, then breaking it down into further action based variables gives you far more points of attack to exploit to increase your profits. For example: “Average Value of Sale” could be broken down by product category, customer type, or transaction channel.  “Number of Transactions” might vary by flavor, store, or location.  “Retention Period” may depend on seasonality or channel (wholesale vs direct-to-consumer).  “Profit Margin” should be separated into variable, fixed, and sunk costs for clarity.  In All Scream for Ice Cream, that might look like: Splitting sales into wholesale vs retail  Tracking unit sales by flavor  Mapping seasonal purchasing patterns  Identifying which flavors or stores produce the highest margin after real costs  Only once you’ve built the model to this granular, action-based level can you begin to build an action-based strategy that is completely unique and relevant to your actual business.  Have I proven the advantages of ABVs over KPIs enough yet? Ok, let’s continue.  Strategy Starts with Sensitivity When your model  is built upon your unique action based variables and put