Once you've got your business plan in place, you'll need to track how your business is performing against the objectives set and take appropriate corrective action where necessary.
- clarity about the key performance indicators (KPI's) that are important, that will tell you whether or not you are 'on track';
- systems and procedures that can generate those KPI's without undue cost or effort, on a timely basis - often technology helps with this one; and
- a commitment by the board/ senior management team to regularly review those KPI's and take any necessary actions in reponse to what they are telling you.
The question is, what KPI's should you be tracking? In truth, there is no "one-size fits all" answer - every business has a unique set of objectives, circumstances, resources. So care should be taken to identify the right things to monitor. What are the activities that must go right in order for the business to achieve its goals? What events could seriously derail the finances or the entire operation? How would you know if your strategy is working, or needs a major rethink? These are critical questions that must be considered when defining relevant KPI's for your business.
Notwithstanding the above, it may be helpful to summarise a few of the KPI's that might form an important part of your approach:
- Turnover. Most businesses will want to monitor turnover - the income from sales, before costs are deducted. It's important to move beyond the simplistic assessment of turnover growth, however, to consider what is driving turnover - what is the impact of pricing, seasonality, or the actions of your competitors, for example.
- Profitability. The gross profit margin - total sales less the cost of producing the goods sold, divided by total sales - is a crucial measure of profitability and productivity. The higher the margin, the more return is generated to cover overheads, fund investment and return to shareholders. There are various ways to influence this metric - by adjusting the pricing (which may affect sales volumes); by increasing sales volumes (which may increase or reduce unit costs), by improving efficiency through investment and innovation, and through better procurement practices.
- Customer loyalty. It is often cheaper to retain an existing customer than to procure a new one. Customer loyalty is all about fostering great relationships with your customers so they buy more from your business, more often, and in bigger quantities - as well as becoming advocates for your products or services. How do you measure customer loyalty in your business? This could be through surveys, collecting feedback at the point of sale, or analysing your purchase data to spot patterns and trends.
- Customer acquisition costs. How effective are your advertising and marketing activities? Tracking customer acquisition costs - total advertising and marketing spend in a given period divided by the number of new customers in that period - can give you important information about whetherthose activities are generating a return. As your business grows and your brand becomes more widely recognised, customer acquisition costs should go down.
- Operating productivity. Productivity metrics should be tracked to help ensure that, as your business grows, it continues to operate efficiently. There are dozens of measures that could be applied here so it's important to narrow down and focus on the relevant ones for your business. Revenue per productive employee? Units of production per employee, per machine? Comparing your productivity to industry benchmarks, or against your own past performance, is often useful.
- Working capital management. In a growing business, managing working capital effectively is crucial. Working capital is the term given to a business’s financial resources that fund day-to-day operations, and consists of relatively liquid assets (stock, debtors, cash) less current liabilities (trade creditors, taxation, bank overdrafts and short term loans). Key metrics include debtor days (an indication of how much credit is offered to customers); stock days (how quickly stock is turned into cash); and creditor days (how effective the business is in getting credit from suppliers). Also current and quick ratios which compare the proportion of current assets to liabilities. Many profitable, growing businesses have failed due to insufficient working capital.
If you’d like help formulating and tracking growth metrics for your business, contact us today.