Are you getting data, information or meaningful KPI’s?
You cannot have missed the deluge of statistics that the government has shared over the last year or so. Movements in the R rate, connections between infection rates and hospitalisation rates, and many other key data that tracks important trends.
Whilst it may seem as though they just pick the graph they want to make the point they want, there is a real clarity about showing important data as trends on a graph.
Similarly, in any business there are a small number of issues that will determine the success of the business. We call these KPI’s (Key Performance Indicators).
KPI’s are an important tool to help you understand and analyse the performance of your business, so that results and trends can be identified and interpreted.
Key data that helps you know if your business is operating within acceptable limits. Each business may have some unique numbers for them, such as room occupancy in hotels, or billed hours in a plumbing business, but these indicators are a vital tool for businesses of every size.
If you are to effectively measure your success, and ensure that you are growing in a sustainable way, you need to keep track of a range of different data.
Each business should define the KPI’s that help them know if their business is on track, and then set the parameters of what is acceptable. So which financial KPIs should you be tracking?
- Cash flow (how close are we to the overdraft limit? Are debts collected quickly enough?)
- Revenue and targets (Are we winning or losing sales? Are we above the breakeven point?)
- Gross Profit Margin (are profit margins improving or in decline? Are we ‘buying’ new sales?)
- Net Profit (are we making more or less money, is the business efficiently run?)
- Return on investment (are we performing to the level expected by investors or the Bank for example)
How do you track your key performance indicators?
The recording of KPI’s will vary between different sized businesses in different industries however, the three fundamentals are:
- Record as much key raw data as practical.
- Decide on which are the vital signs in your business, and monitor these closely
- Ensure that trends and results are “in context” (Increase turnover may be a bad result if it is at the expense of profit margins)
The core idea is that these numbers are like the dashboard on your car. Some data is critical such as fuel. The dial is highly visible, and it will give early warning signs if too low. Another may measure the temperature, which is almost always within acceptable limits, so set to send a warning only if too high or too low. You need your business dashboard to measure those critical bits of data that could mean you run out of fuel (cash) or which would damage the business if left alone to exceed limits (overheating your car or overtrading your business). You want to set parameters that allow you to leave them alone, except when they start showing signs of getting beyond normal levels, when a warning signal is triggered.
For example if you run a hotel you may want to measure your occupancy levels. You might set occupancy targets at between 75% and 95%. And only act if the actual result is outside this. I.e. high occupancy may mean under-pricing and low occupancy may hint at service issues or poor trip advisor scores. If it is within this range, focus on something else to improve.
We work with many businesses that only report information in the form of monthly profit and loss accounts and perhaps monthly balance sheets. This raw data may be interesting, certainly if it shows a loss in a particular month for example. But this information is often being seen by non-financial people, and can be hard to interpret. Equally, in isolation, any month’s results can be explained away with a “yeah but” or “but this month was different because…”.
If you have 10 to 12 KPI’s and you show this in graphical format, the trend lines are hard to ignore.
One client we worked with saw a big surge in gross profit margins and net profit following a two year Healium project. The client was delighted, but then returned to old habits too quickly. Annual results saw turnover, gross profit and net profit grow over the following 5 years. But if they had been tracking and reporting other KPI’s the inevitable outcome would have been obvious. Every measure of scale (turnover, employee numbers, gross profit, customer numbers, and even net profit) showed an upward trend. Yay!!
Every measure of efficiency (gross profit margins, average value of each sale, sales per employee, net profit margin, debt collection days etc) showed a downward trend. Boo!!
If you continue those trends and show a business that is getting bigger each year, but with reducing efficiency and effectiveness, the end result is inescapable. If you make £500k profit on £10m turnover, and grow that to £700k profit on £25m turnover, alongside the problem of customers taking 90 days to pay when it used to be 60, and you will inevitably have a cash crisis at some point. Which they did.
So our question to you is…what are your KPIs? Do you measure, report, interpret and act on the key numbers that measure the health of your business?
If you need any help with your KPI’s, just give us a call.
THINK. PLAN. ACT.