Understand Your Business Better With Key Performance Indicators
Oftentimes, companies have controllers who are great “numbers” people, which is terrific when it comes to literally (and exclusively) crunching the numbers. The problem, however, is that these money whizzes aren’t always aware of how one seemingly minor factor over the course of a day or a week can impact the company’s overall cash flow in a major way. Many business owners struggle to get a handle on every single company function simply because it’s just too easy to revert to the practice of keeping our heads down and putting our noses to the grindstone. And while this way of working may feel productive, nothing is actually being done to move the business forward in the long run.
Instead of treading water, how about zeroing in on ways to grow the business? Measuring your key performance indicators (KPIs) is a great place to start.
What Are Your KPIs?
The first step is to zero in on the actions that generate positive results in your business. From there, you will not only track them, you will need to aggressively manage them. KPIs can vary greatly from industry to industry. For example, KPIs for manufacturers might include materials, production by shift, inventory, overtime or scrap. In the construction industry, KPIs could deal with the daily production of each crew member, equipment run time, daily costs or overtime.
When determining your business’s KPIs, consider the various ways you can measure whether you are being successful or not. Once identified, you can start paying close attention to them every single day. Ultimately, your goal should be to use the current information generated by your KPIs to formulate optimal business-minded decisions.
For example, if you’re a manufacturer or distributor, you probably keep inventory with the goal of moving it back out the door as soon as possible. Unfortunately, things don’t always go according to plan. It’s not rare to see some companies struggle to pay their bills and yet have hundreds of thousands of dollars in inventory sitting on the floor. Inventories are major cash guzzlers.
Think about of all the clearance sales you see. Sure, stores use clearance prices to lure you in, but they are also legitimately trying to get rid of inventory. Liquidating could provide you with the influx of cash you’re looking for while allowing you to consider investing in something that could actually bring money in.
Listen to episode 60, “Know The Why Before They Buy: Power Your ROI With Research,” on unsuitable on Rea Radio, for more great business management insight from Kyle Stemple and Mark Fearon.
To the Budget and Beyond
One of the biggest business planning tools is your budget. However, the days of setting a budget in stone at the beginning of the year and expecting it to be the same 12 months from now are over. During the recession, business owners learned that annual budgets weren’t as useful as they had previously thought. That’s when supplemental rolling forecasts came into play. These tools give business owners the ability to reallocate resources as needed. As a rule, forecasts are done on a quarterly basis from four to eight quarters out.
That being said, don’t totally disregard your budget. It can help you control costs and communicate company performance. Just don’t set it and forget it ̶ be sure to update it throughout the year.
In a Flash
A flash report allows you to list out your identified KPIs and see how you are trending compared to a historical period, which may be as recently as two weeks ago. These are normally compiled daily or weekly.
We once had a client who ran his business with accounting reports before he discovered the power of flash reports. He first identified three KPIs, (sales per day, inventory over 90 days and gross margin per day), then set and measured daily goals for each of them. It didn’t take long for his revenue to double and within two years, his profitability increased 500 percent simply by focusing on those three numbers each day.
You can make better business decisions by using the information you already have at hand. All you have to do is get your arms around the data. This information can help you look ahead, make adjustments, act quicker and outmaneuver your competition.
We can work with you or your CFO to develop a plan that’s right for you. By helping businesses in this way, we are able to take the stress off of business owners, reduce costs and maximize revenue. Contact Rea & Associates to find out how we can help you.
By Ben Froese, CPA (Wooster office)