|
|
|
Angst Over Critical Numbers -- Using KPIs to
Manage Your Business
Identifying
and interpreting statistics for a business does not need to be a scary
prospect.
Tracking critical numbers helps monitor cash flow operation as well as
profitability, which is all-important for businesses.
Critical numbers and the mere mention of them make some business
operators feel squeamish because of an unjustified fear of what they
consider to be unknown territory.
Identifying such vital statistics, interpreting the information and
applying the knowledge, as well as regularly tracking the figures is not
as complex as its sounds.
The practice is essential for survival and success.
A disciplined approach should be adopted so business operators go
through the process formally, not just in their minds and have ready
access to the statistics.
A business development
professional can help those who are nervous when it comes to figures
learn how to identify, interpret and track critical numbers, as well as
other key performance indicators (KPIs), so they can use the information
to the best possible advantage.
A business development professional's assistance will be invaluable in
most cases - so too can that of suppliers of basic accounting software
packages in terms of explaining how to read the information that is
being generated.
Small and medium business issues specialist, Sue Prestney, says it is
important for operators to "own up" to their accountants if they don't
understand so they can learn how to work out ratios and interpret
figures.
Once businesses have mastered the key figures, it is simply a matter of
checking them off with their business development professional perhaps
once a quarter.
"Some small operators say the can't afford the assistance they need, but
they can't afford to go broke either," says David Cordy, small business
management advisor.
Businesses are very good technically at what they do but if the
owner/operator struggles to manage certain areas then they need to seek
outside help, Cordy stresses.
Judy Hartcher, a business policy
advisor, describes critical numbers and other KPIs, as the pulse of any
business because they provide the measures to check the overall health
of an operation.
There is a whole raft of KPI's - financial and non-financial, obvious
and hidden - and their relevance is determined largely by the type and
size of the business concerned.
There are usually five or six core financial performance measures that
should be tracked regularly.
"Some businesses are more focused on ratios and others are keener on
sales figures ... there is no one perfect way," says Hartcher.
Asset ratios, debtors days outstanding, creditors days outstanding,
stock turnover, cost of goods sold, cash flow/working capital, breakeven
points and profitability figures are among those topping the list.
Hidden figures such as the cost of borrowings are also part of the
picture.
Cordy strongly advises operations to conduct a regular "waste" audit to
keep a check on what "profits are going out the door" because of double
handling, carrying too much stock, poor management of staff hours and
unnecessary paper flow.
The identification, tracking and use of critical numbers is part of the
"balanced scorecard approach" to business, according to Prestney.
In a balanced scorecard approach, businesses focus on the core segments
of the operation and determine what it is they want to achieve in each
area.
Core segments include financial elements such as critical numbers,
people, customers and marketing, and operational and for some,
innovation.
Tracking critical numbers helps monitor cash flow, the lifeblood of any
operation, as well as profitability.
"Profitable businesses can still go broke," warns Prestney.
Sue Blatherwick, a senior manager in assurance and business advisory
services, noted the importance of tracking the level of debt to which
smaller businesses are particularly vulnerable.
"Businesses need to regularly check that their debtors are paying
quickly enough for the business to pay its own creditors," Blatherwick
says.
Another area stressed by Hartcher is the importance of understanding the
relationship between gross profit (the difference between sales and the
cost of sales) and prices.
Many businesses do not understand that lower prices and increased sales
do not guarantee greater profits.
For example, says Hartcher, if a business has a gross profit of 10
percent and it reduces its prices by 2 percent, the volume of sales will
have to be increased by 25 percent in order to maintain the same level
of gross profit.
|
|
