What Do KPI’s Mean For Your Business?
Why KPI’s anyway?
Key Performance Indicators (KPI’s) are a crucial way of monitoring and evaluating a businesses success – but why?
Many small business owners can be so busy managing the day to day operations that they lose sight of overall performance and may not be able to answer a fundamental question – just how successful is my business? It’s all well and good being rushed off your feet but is it sustainable? Are you making money? Studies suggest that almost half of all small owner managed businesses don’t have KPI’s and have little concept of their performance until the end of the financial year.
Why should I bother worrying about these?
Even the simplest and of KPI’s will be more insightful than none at all.
Just as monitoring your physical well-being is essential for maintaining your body, KPI’s should be an essential part of the ongoing health assessment of your business.
However, it is important that your KPI’s are aligned with the core activities of your business and that they are linked to its’ strategic direction, otherwise you run the risk of getting bogged down in unimportant detail whilst missing critical insight about operating activities.
There are literally hundreds of different KPI’s which can be measured within a business however, it is important to ensure that basic financial KPI’s are implemented and understood to monitor and ensure financial health, after all, no cash = no business.
Once you have a solid understanding of how financially stable you are and more importantly, how financially viable your business is, you can expand your set of KPI’s to cover other financial and non-financial bases. These can be as elaborate as you wish, provided they are relevant to you! The below is what I’d consider key and a bare minimum.
4 Key Financial Measures
- Cash flow – arguably the most important aspect of financial management in any business and certainly most important for new or growing businesses. Have you enough collateral to maintain your business? Do you need to start thinking about external investment or bank financing?
- Profitability – if you’re not making enough profit margin on your sales to cover your basic costs, cash no longer becomes an issue – you just wont have any…
- Working capital measures – age of sales debtors and stock/work in progress. Both are essentially cash items which either need collecting from your customers or billing on to them in order that it can become cash.
- Income/revenue growth rate – are you growing or shrinking as a business – what is the likely long-term knock on effect for you?
Where do I start?
Ok, so now you’re beginning to appreciate that it’s not a load of old rope, what do you actually need to do in order that you can monitor your organisations’ well being? Here are a few pointers to get you thinking:
Ask yourself, ‘what do I actually understand about the financial position of my business at this point in time?’
Map out key financial data such as current profitability, non-cash items and non-profit cash-impacting items.
Realistically forecast profitability and cash impacting items for a reasonable period (start with 12 months) and review regularly.
Assess the gross margin/mark-up of your top 10 products/services to ensure you’re actually making money from them.
Check your customers aren’t stretching their credit terms and equally, stay on top of your invoicing to speed up getting cash in the bank.
Understand what you’re selling and monitor performance against prior expectations – are you increasing or decreasing in size and what does this mean?
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