Category: Business Growth
You probably wouldn't embark on a long drive without checking a map. Yet some companies do just that — basically operating blindly when watching a few key performance indicators could help them stay in the black.
Key performance indicators are measures that will give you an indication early in the month about what your financials (both cash flow and profitability) will look like at the end of the month. These indicators will vary, depending on the type of business you’re in, but some that are consistent include the following:
• What are you invoicing on a weekly basis? Every Monday you should look at what you billed the previous week. If you’re not one-fourth of the way to your expected monthly billing after the first week, you’re effectively in a hole, and will need to increase billing in the remaining weeks.
This is so obvious, and yet many small to mid market companies wait until the end of the month to look at what they’re invoicing — when it’s too late to take action to correct a shortfall. As companies grow from small operations and become more complex, other details begin to consume their time — customer questions, administrative details — and they take their eye off the (invoicing) ball.
• What are your margins on a weekly basis? Just as important as monitoring sales is the need to monitor the profitability of those sales. You should ensure your pricing and costing data is updated real time so that profitability by customer and product can be evaluated regularly.
Use the 80/20 rule for this weekly effort. Monitor the 20 percent of your products and customers representing 80 percent of your business.
• Look at head count measures. This is not really a concern for a business with 10 employees or fewer, but as your company grows business demands and complexity can change quickly. Efficiency of resources should be monitored frequently. Is sales-per-employee trending up? Are expenses trending down as a percentage of sales? If you answered “no” to either, your operations are becoming less efficient and less competitive.
Tracking head count closely is vital to measuring the efficiency and thus profitability of your operations. Not only are you paying the salaries and benefits of those employees, but they all do things — which cost money. A new marketing person will generate costs of brochures, advertising, and other marketing costs. A new accounting person will increase consumption of office equipment, supplies and training costs. Employees simply generate costs in the normal course of business. These costs seem immaterial on an individual basis but they add up and you need to make sure you get a return on your investment as your business grows.
• For cash flow, look each week at how your receivables, inventory and payables changed from the previous week. In other words:
--What customers purchased compared to what they paid
--How much cash you have tied up in inventory waiting to be sold
--What you purchased from suppliers compared to what you paid them
As companies grow they’ll often agree to extended payment terms with their customers. The growth can also increase how long inventory is held before the sale. If the time to turn the inventory into a sale and collect the receivable increase with no change in supplier terms, cash flow takes an adverse hit. In essence you’re operating as your customer’s bank thus increasing the financing costs to operate your business.
So what do you as a business owner or manager do with these performance indicators? Keep this information in front of your managers and your employees who interact with your customers. That way you will avoid surprises, anticipate financial issues, and be able to manage accordingly.
We’ve all heard the old saying about the importance of keeping the customer happy. Perhaps a better saying would be: Keep the customer happy — and get the work done profitably. Your customers want the value your company brings around for the long haul.
Chuck Williams is dean of the College of Business at Butler University. J. Christopher Stump, CFO services project manager, Butler Business Accelerator, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness or e-mail Chuck at firstname.lastname@example.org.
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