Firstly, all businesses of whatever size are required to keep financial records. They do this for a number of reasons. Statutory filing at Companies House. To allow the calculation of HMRC taxes. And to report back to external investors and providers of finance such as banks.
The numbers are, however, of most use to the business owner or management team that is charged with actually running the business.
The numbers provide an objective insight into the performance of the business and our best accessed through a small number of key performance indicators. These should be reviewed on a frequent and regular basis. Simple measures that could be looked at daily would be total sales volumes, ledger balances and bank accounts. Other key measures such as gross and net profit would be considered on a monthly basis.
There are three main tools to assist with looking at the figures and these are budgets, comparatives and ratios.
A study of variances from budget either positive or negative should be thoroughly investigated and corrective action taken if necessary. Comparatives are looking at figures for an earlier time period. Such as the previous month or the same month last year. Again significant variances should be thoroughly investigated. Simple ratios give a powerful insight into the underlying figures. Gross profit percentage is a key indicator for many businesses and is simply gross profit divided by total sales. A falling gross profit percentage is a cause for concern.
Cash flow control
Control of cash flow is essential for all businesses. Cash is required to pay salaries, suppliers, taxes, loans etc and is needed in a timely fashion. A key performance indicator here is net current assets. This basically comprises of stock, debtors and cash less creditors and short term borrowings, such as bank overdraft. A negative figure for net current assets indicates that a business will struggle to pay bills as they fall due. Bank accounts need constant monitoring to ensure that facilities are not exceeded.
Ratios are useful for monitoring and controlling cash flow. Some key ones are stock turnover to ensure that too much money is not tied up in financing stock. Debtor days which similarly ensures that not too much money is tied up in financing the sales ledger. And creditor days to ensure that full advantage is taken of suppliers’ credit terms.
Finally, there are many other numbers that are useful such as sales/profit per employee, sales by product, location, region or salesperson. Likewise, figures such as aged debtors and aged creditors analysis and certainly specific indicators of the success of your own business.
So what looks good?
In my opinion there should be a number of daily and monthly KPIs. Monthly budget and comparative analysis, cashflow forecasting and a detailed explanation of any variances and what action has been taken to bring matters back into line. The accounting system needs to produce reliable information in a timely manner. This is becoming increasingly easy with modern software packages.
About the author:
Graham Matthews is a business coach with Pro-actions covering Oxfordshire and Gloucestershire. For a free chat with Graham or one of the other coaches about your numbers or other business issues please contact us today.