There is a quote that springs to mind when I talk about measurement. It’s “what gets measured gets done.”
It’s a five word story really. You focus on the thing that is measurable. The same can be said for a business. How do you know if you’re doing well? You look at your sales, your staffing levels, your growth in the market. You analyse your performance.
Performance can only be managed when you start measuring, when you decide what it is you want to measure.
This is where KPIs or Key Performance Indicators are essential to knowing where you stand on a daily, weekly and monthly basis. Having control over your accounts, your KPIs, gives you power to make informed decisions, to make changes, to change direction, to take advantage of opportunities and to grow your business.
What gets measured gets done because it focuses you and your business on performance. Comparing performance yearly, quarterly and month by month allows you to identify patterns – whether good or bad – so you can make the right decisions for your business.
In terms of what gets measured, well, every business and industry sector is different. However a common set of rules apply.
Rule No. 1 – Decide KPIs with your entire business in mind
Create your financial KPIs with other business KPIs. It’s important to create the right KPIs for your entire business. You won’t be able to triple revenues in three years time if you’ve got a sales growth target of 10% this coming year and a staff of one. Your accountant will be able to help you with this.
You should always pick a maximum of 6 KPI’s, at any time, no more than this as there will be too many. Examples of key performance indicators are:
- Gross Profit by product
- Profit and Loss Account
- Key Financial Ratios
- Current Ratio Acid Test Ratio
- Gearing Assets
- Sales Debtor Days
- Creditor Days
- Net Profit %
- Return on capital %
- Return on assets %
- Operating Profit
Your accounting systems should monitor more than just your monthly finances, your KPIs can be monitored as well. For example, the number of customer complaints, orders delivered on time, conversion of sales leads to customers, quality control rejections and staff productivity etc.
Rule No. 2 – Group your KPIs into categories
This makes things easier to create the KPIs, monitor them and measure them. It’s like starting with a blank piece of paper and being told to write. It’s so difficult knowing what to write or take that first step.
Here at AG Associates, we suggest categories for our clients and we create a list of KPIs to measure.
Take the list from the rule number 1 above. Categorise them into growth, productivity and cashflow.
Let’s use breakeven analysis as a KPI category. At what level of sales do you breakeven? How does this work out on a weekly, monthly and annual basis? What level of profit do you need to cover costs? What level of profit is needed to reach target profits?
For a business selling products, the breakeven point is calculated by dividing the company’s total overheads by their gross profit margin. The gross profit margin is gross profit over total revenue.
Rule No. 3 – Always know how to answer the ‘What If’ Question
The beauty of financial KPIs is that you can make informed decisions based on your numbers. Knowing your financial situation, be it cashflow or cost of goods sold is so, so important. In today’s fast paced world, you really need to have a real-time view on your KPIs. Our new service, Clarity, allows you see in real time exactly how you are doing.
You can monitor your performance against key performance indicators, agreed with your accountant. You can analyse sales growth, gross margin, net profit, how long it takes to get money in and how much credit you’re giving your debtors.
Once you know all the above, you are in a powerful position to be able to ask the what if questions about the business. You can now measure the impact on your key performance indicators, breakeven point and financial projections.
If you’d like to discuss anything in this article, please get in touch.
AG Associates is an accounting practice that specialises in affordable accounting and payroll solutions for the SME business owner. It’s new service Clarity combines online book-keeping with offline accounting to provide an instant snapshot of how a business is doing right now.
For further information please contact Angela at Unit 11, Eastgate Way, Little Island, Cork, 021 482 4723 or email@example.com.
AG Associates Accountants
11 Eastgate Way, Little Island, Cork
021 482 4723