What should you be measuring & why?

The strong businesses are those that are well managed and designed to withstand outside influences, or have factored in potential risks and have a plan to manage the situation. If you're just starting out in your business, it's important to start the way you want to go on.

A key area where the owners of strong businesses focus attention is on the numbers for their decision making. It's not suggesting that you apply all of the following Key Performance Indicators to your business today; but it's worth noting one or two items to focus on from the start. This will help get you into the habit of making pragmatic decisions, rather than emotional or 'gut feel' decisions regarding your business as it's grows.

Not many business owners enjoy the financial side of running their business but with 80% of businesses closing within 3 years of starting - the quote below distills this perfectly.

"The successful person makes a habit of doing what the failing person doesn't like to do."

Thomas Edison

Astute business owners know:

Sales - know which customers, products and services will give you the best return for your money

• The trend in sales figures and what impacts them
• Which products/services are profitable and which are not
• Which salespeople are producing the best results in sales as well as profit.
• Which jobs they made money on, which they lost money on and why
• Personnel productivity in a service or job based business i.e. how many hours they sold compared to those they paid for.
• Which customers are contributing the most in sales and profit
• Key Performance Indicators for their specific business e.g.  sales - per salesperson, per square meter of retail space, per customer etc.

• What to charge for their products and services in order to be profitable as well as competitive.

Costs and Overheads - a monthly check on these numbers could save a fortune!

• The true cost of their products and services and how they are trending

• The exact amount of overheads and a comparison to budget – this enables them to take very quick action if the variance is not in their favour.

Profitability - do you know your break-even point?

• The gross profit or contribution to profit of various product/service lines or divisions of the business.
• Their gross profit percentage for the current month and year to date, as well as a comparison to previous periods.  Some also compare against benchmarks for their industry.
• Net profitability every month i.e. what’s left each month and for the year to date after deducting costs and overheads from the sales figure.  The costs and overheads need to be relative to the sales i.e. if you sell some software in a month you need to deduct the cost in the same month.
• Actual results compared to a budget of profit and loss, as well as a rolling forecast of actual results, compared to future projections, showing where they will be at the end of the year if projections are met.

• Their ‘Break-even’ point i.e. how much they need to sell to cover costs and overheads without making a loss or profit.

Cash Flow - no point trying to increase sales if you haven't got cash in the bank to pay your suppliers

• Their stock level and the amount required to meet near and long term needs.
• The average stock turn days i.e. how many days on average stock is sitting on the shelf waiting to be sold.
• Their Work in Progress level and the average number of days jobs are in progress until they are finished or invoiced.
• The amounts outstanding to suppliers and the number of days on average they are taking to pay all suppliers.
• The amounts owed by customers and the number of days on average customers are taking to pay (can be vary greatly from the actual credit terms given to customers!)
  The amount of tax due (GST/PAYG etc.) and if they will be able to pay it when due.
• Forward projection of cashflow i.e. the future monthly bank balance based on assumptions of customer receipts and all payments due.  In tough times this may need to be known on a weekly and even a daily basis.
• The dates when leases or lending facilities are due to end so they can plan for renewal or replacement.  In some cases the biggest threat may be bankers tightening their requirements and not renewing or allowing the replacement these credit facilities.

The above may seem like a lot of information, but most of it is available from off the shelf accounting software - if properly set up.  Some of these numbers may need to be prepared by a trained financial professional.  

< back