Know Your Key Numbers

A recent article in the Australian Financial Review suggested the three main reasons for small business failures were:

  • Poor financial management (28% of failures)
  • Poor accounting (16%)
  • Lack of management experience (15%)

So how do you recognise the warning signs in a business? Key Performance Indicators or KPIs let you monitor what is happening in the business and the power of KPI's comes from a simple concept - What you can measure you can manage.  KPIs let you know where you stand at any given moment so you can adapt or change your strategy to improve your results right there and then. Knowledge is the power that drives better results and the following KPI’s are simple to track.

Sales - You would be amazed how many small business owners do not have access to an accurate sales figure. Sales are the first indicator of the business trend (up, flat, down).

Gross profit margin as a percentage of sales - This compares the prices you charge your customers with the prices your suppliers charge you. An increase is good, flat lining could be satisfactory while a decrease is an alarm bell.

Profit before tax as a percentage of sales - Ideally this figure should increase but flat could be acceptable but a decrease is definitively a warning sign.

Cash flow forecast - Calculation = Cash at bank + Cash in over the next four weeks – cash out over the next 4 weeks. This calculation for each of the next four weeks will tell you if you have enough money to pay your bills at the end of the month.

Debtor Days - Calculation = Accounts Receivable / Sales x 365.  This tells on average, how many days it takes for the money to reach your bank account after you have issued invoices. A decrease is good sign while an increase is an issue.

Creditor Days - Calculation = Accounts Payable / Purchases x 365.  This tells on average how many days you take to pay your suppliers. Monitor that figure and compare it to the debtor days. Ideally, creditor days are equal or higher than debtor days. If it is lower, you need to either improve your collection or negotiate better payment terms with suppliers to avoid a cash flow problem (Danger!).

Inventory Days - Calculation = Inventories / Purchases x 365.  This tells you on average, how many days the goods you purchase stay in your warehouse or on your shelves before you manage to sell them to your clients. The lower, the better.

Number of customer complaints as a percentage of number of sales - Your customers will stay with you and buy again if they feel looked after, so measuring the number of complaints and taking action to reduce that number helps to build a sustainable business.

Ideally your KPIs need to be tailored to your business and should track those things that clearly tell you at a glance how your business is performing.  If you're not measuring your KPIs how will you know if you're on or off track at any given moment? If you don't know the answer to that question it's unlikely you'll achieve your goals.

IMPORTANT DISCLAIMER: This article is published as a guide to clients and for their private information. This article does not constitute advice. Clients should not act solely on the basis of the material contained in this article. Items herein are general comments only and do not convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas.