KPIs or Key Performance Indicators are essential in every business. They are performance measurement tools that you look at daily, weekly, monthly, quarterly and annually. It will help you measure and predict the health and efficiency of your operations. The effective interpretation and use of your KPIs can help you with some very critical financial management tasks:
- Avoid being surprised or ambushed by weak results
- Define and measure the progress you are making toward your goals
- Make informed decisions about budgeting and resource allocation
- Detect waste, inefficiencies or fraud
- Give you the confidence you need to face your lenders or investors
- Give you the comfort you need to sleep at night
Remember, as your business grows, you may one day need to raise capital. These reports and controls are often looked at in great detail by lenders. The sooner you’re capable of producing and understanding these reports, the more secure your growth plan will be.
Here are the 7 SMART numbers you need to take back control of your business:
Sales. The first indicator of business trends are accurate sales figures. It doesn’t matter whether they are increasing, decreasing or flat-lining, they give a clear signal of where you are heading. However, they must be monitored in conjunction with bottom-line performance as well.
Many small-business owners become too revenue focused, taking false comfort from sales growth even though margins may be shrinking.
Cash flow forecasts. This should be calculated on a weekly basis. The calculation looks like this:
Cash in the bank plus cash coming in over the next four weeks
minus cash going out over the next four weeks
This will reveal if there are any cash shortfalls over the next four weeks and what is your ability to pay your bills at the end of the month.
Debtor days outstanding. The average number of days for customers to pay your invoices. The calculation looks like this:
Accounts receivable divided by sales multiplied by 365
A decrease is a positive sign. And an increase is an issue that will affect your cash flow and your ability to keep your creditors current.
Creditor days outstanding. The average number of days for you to pay your suppliers. The calculation looks like this:
Accounts payable divided by purchases multiplied by 365
This needs monitoring in conjunction with your debtor days, as ideally, you would want the number of creditor days to be equal to or higher than your debtor days.
A lower number means you need to improve your debt collection. You could also reduce your customer’s credit terms or negotiate better payment terms with your suppliers to avoid cash flow problems. This is one of the critical numbers that can cripple a small business.
Inventory days or stock turnover. The average number of days your stock remains on your shelves or in your warehouse before you sell it. The calculation looks like this:
Inventory divided by purchases multiplied by 365
The lower the turnover, the better it is for your cash flow. Ultimately that assists you with growing your business and expanding your customer base without straining your resources.
Inventory that’s “collecting dust” is costing you money, may be stale or obsolete. You need to track what’s moving and what’s sitting and, most important, understand why. Stay close to your sales numbers and analyse any inventory that’s stuck on your shelves.
Gross profit margin as a percentage of sales. The price you charge your customers against the prices your suppliers charge you. The calculation goes like this:
Gross profit divided by Sales multiplied by 100
An increase is usually a good key indicator. A break-even or a decrease signals that there are flaws in your business model, your overheads are too high or prices are too low.
Profit before income tax as a percentage of sales. The price you charge your customers against your profit before income tax. The calculation goes like this:
Profit before Income Tax divided by Sales multiplied by 100
This figure should increase, though a flat line may be acceptable for a period. However, a decrease may be a warning sign of further potential losses.
Once you decide on the critical numbers for your business, review and digest them on a daily basis. Make it a regular task just as you do your morning coffee or vitamins. If you have managers in your business, you need to share these numbers with those who manage them. They should form the basis for daily huddles, brainstorming and longer-term strategic planning. These numbers will help you drive business growth and achieve your business goals.
Top 5 Tips to Manage Your Business Finances, Without Going Broke.
Do you want to learn how to read you business numbers and get you “financial” act together? Our Top 5 Tips guide will also show you the 5 essential reports every business owner needs to find the hidden profits in your business.
Amanda Dyason, Founder of ProfitSmarts
We help Australian business owners increase profits, accelerate cash flow and master their financial management. We believe life is too short and precious to be stuck in an under performing business delivering mediocre results.
ProfitSmarts gives you more Profits and consistent Cash flow, putting you back in Control. Because when you get business right, the results are simply amazing.