What you can measure, you can manage

What should you be measuring & why?

FLB recognises that strong businesses are those that are well managed and designed to withstand outside influences, or have factored in potential risks and have a plan to manage the situation. If you're just starting out in your business, it's important to start the way you want to go on.

A key area where the owners of strong businesses focus attention is on the numbers for their decision making.

FLB are not suggesting that you apply all of the following Key Performance Indicators (“KPIs”) to your business today but it's worth noting one or two items to focus on from the start. This will help you to get into the habit of making pragmatic decisions, rather than emotional or 'gut feel' decisions regarding your business as it's grows.

Sales - know which customers, products and services will give you the best return by monitoring the following KPIs:

The trend in sales figures and what impacts them.
Which products / services are profitable and which are not?
Which salespeople are producing the best results in sales as well as profit?
Which jobs you make money on, which you don’t and why?
Personnel productivity in a service or job based business i.e. how many hours they sold compared to those they paid for?
Which customers are contributing the most in sales and profit?
Key Performance Indicators for their specific business e.g. sales - per salesperson, per square meter of retail space, per customer etc.
What to charge for your products and services in order to be profitable as well as competitive.

Costs and Overheads - a monthly check on these KPIs could save £££’s!

The true cost of your products and services and how they are trending.
The exact amount of overheads and a comparison to budget – this enables you to take very quick action if the variance is not in your favour.

Profitability - do you know your break-even point?

The following KPIs are useful measures of profitability:

The gross profit or contribution to profit of various product / service lines or divisions of the business.
Your gross profit percentage for the current month and year to date, as well as a comparison to previous periods. Comparisons against benchmarks for your industry.
Net profitability every month i.e. what’s left each month and for the year to date after deducting costs and overheads from the sales figure. The costs and overheads need to be relative to the sales i.e. if you sell some software in a month you need to deduct the cost in the same month.
Actual results compared to a budget of profit and loss, as well as a rolling forecast of actual results, compared to future projections, showing where you will be at the end of the year if projections are met.
Their ‘Break-even’ point i.e. how much you need to sell to cover costs and overheads without making a loss or profit.

Cash Flow – there is no point trying to increase sales if you haven't got cash in the bank to pay your suppliers

The following KPIs are useful measures of cash flow:

The stock level and the amount required to meet short and long term needs.
The average stock turn days i.e. how many days on average stock is sitting on the shelf waiting to be sold.
The Work in Progress level and the average number of day’s jobs are in progress until they are finished or invoiced.
The amounts outstanding to suppliers and the number of days on average they are taking to pay all suppliers.
The amounts owed by customers and the number of days on average customers are taking to pay (can be vary greatly from the actual credit terms given to customers!)
Forward projection of cashflow i.e. the future monthly bank balance based on assumptions of customer receipts and all payments due. In tough times this may need to be known on a weekly and even a daily basis.
The dates when leases or lending facilities are due to end so they can plan for renewal or replacement. In some cases the biggest threat may be bankers tightening their requirements and not renewing or allowing the replacement these credit facilities.