Navigating your business toward success can be like sailing a ship with a faulty compass at times. The needle can seemingly spin in circles trying to find where true North is.
When you need to make wise business decisions, you need your compass to reliably show you the way. Good business intelligence is the answer.
What to measure
Determining the best indicators of business performance can set you on the right path while choosing the less important indicators can give a misguided sense of success or failure.
Profit is great, but cash pays the bills and helps a business prosper. Common financial Key Performance Indicators (KPI’s) applicable for most business include:
- Current Ratio - the ability to pay all financial obligations in one year
- Interest Cover - how easily interest can be paid on outstanding debt
- Return on Assets - the profit generated on assets owned
- EBITDA Earnings Before Interest, Taxes, Amortisation, Depreciation. Measure of profit without costs of debt, taxes and de-valuation of assets
- Debtor Days - how long it takes to receive payment from customers after invoicing
- Creditor Days - how long it takes to pay bills after being received
Specific Business Performance KPI’s may look a little different:
- Inventory Turnover - how efficiently trading stock is sold and replaced. Suitable for retail businesses such as a clothing store, bakery, or supermarket
- Revenue per FTE (Full Time Equivalent Employee) - how much revenue is generated for each employee in the business. Suitable for service businesses such as a doctor/dentist, contractor, or café
- Sales Growth % - the change in revenue of a certain period. An expanding business will have a higher target than an established business
What’s normal for which business
Once you know what business performance indicators you are monitoring, deciding what is normal, what is great, and what is a concern, is the next priority. A farm business is not a pharmacy, just as a gift shop is not a construction business.
Information about different types of businesses, and in different locations across Australia is available through various organisations, in the form of benchmarks. This is a good staring point to set your target ranges for each KPI with realistic expectations based on available opportunities, financial or operational constraints, and your personal business goals.
Keep it simple, use a traffic light system. Green, amber, red.
The KPI’s and their normal ranges are your green, letting you know that this cog in your business is turning like a well-oiled machine. Results just below your expectations are amber and may need closer monitoring. Results well below expected targets are red and cause for concern, these need immediate attention.
A dashboard reporting system will give you this in an easy heads-up format. If it is connected to your cloud-enabled accounting system, it is a real-time view that will allow you to drive your business like a formula 1 car.
If you have any questions regarding business performance management contact your local RSM office.