Time to track KPIs in your business
One of the biggest misconceptions amongst small business owners is that KPI’s are something that big businesses set and track. They and their business are not sophisticated enough for KPIs or they don’t need a KPI to tell them how their business is performing or they’re snowed under with work and don’t have time for more admin – these are just a few of the common responses we receive when we question how they track performance and growth.
So what exactly is a KPI and how will it help you manage your business? A KPI is a Key Performance Indicator. Coming in different shapes and size, they can be implemented to measure just about anything worth measuring in your business. They can have either a financial or operational focus and will not only help you grow and remedy pain points, but assist with strategic planning.
Different KPIs will tell you if your business is growing as quickly as you think, or if you’re really making as much money as you believe. If your pricing is right or if you can afford to invest in new equipment. How long it takes you to convert a sale into cash or how long stock sits on a shelf.
Every business has different needs, problem areas or strategic plans so there is no one size fits all when it comes to KPIs. You need to look at your business and understand what will drive it forward or what is currently causing you grief. If for example cash flow is an issue, good KPIs to implement are:
Debtors days – average days it takes you to convert sales into cash. The lower the figure the better
Stock turns – How many times your stock moves over the course of the year (read more about the correlation between stock and cash here)
Creditor days – average payments terms with suppliers. In a perfect world, you’d like this to be higher than your debtors days, so you get paid before you need to pay your creditors
Where you’re experiencing profitability issues, the following KPIs will provide valuable information:
Sales growth % - percentage growth in revenue from one period to another. If tracked over a few months you may be able to identify trends and implement measures to address them.
Gross margin % - measures what you make from a sales after you take away cost of the stock you sold. The higher the margin the more money you make, the lower the less you make.
Net profit before tax % - will tell you what you are making after your take into account all of the costs associated with your business. The higher this percentage the more money you are making
We recently worked with a client who felt they had a good handle on their sales margins however their profit and loss was telling us a different story. Sales looked to be up, but profitability was down, despite overhead expenses remaining stable. We started tracking both their sales growth % and gross margin % and over a couple of months we discovered that sales were up on prior months, however their gross margin as a % of their sales had decreased. In other words they were making less on each sales transaction than they believed. As we investigated the reason for this drop in margin, we discovered that one of their sales staff was heavily discounting stock to meet sales targets. In some cases stock had been discounted below cost! So they were seeing an increase in sales because of these discounts, but they weren’t making any money off these sales, if anything these sales were actually costing them money.
Tracking these KPIs gave our client visibility of a profit issue in their business which they were then able to investigate and rectify. They now track gross margin performance on a monthly basis, and take corrective action as soon as they start to experience any serious deviation from their targets.
The Victorian State Government offer some great tools to small businesses via their Business Victoria website. When it comes to KPIs, you can find a comprehensive list here with details on how to calculate them.
If you’d like to implement KPIs in your business and would like some support calculating and/or interpreting them feel free to get in contact at info@brambleandbriar.com.au.