I’m a believer in the power of measurement, which is why it’s one of the important tools that Small Fish uses with clients.
It’s been said that Peter Drucker stated that “What gets measured, gets done,” but it appears that may be stretching his words a little. Nevertheless, I’ve directly experienced the power of measures and metrics in many different contexts.
The business world might have you believe that it’s all about measuring the money – particularly, revenue, margins, and profit. I don’t have a problem with those, but they often don’t give much guidance for day-to-day decisions.
Should your front-line employee give a refund under somewhat questionable circumstances? If they do, revenue and profit will go down in the short term. But revenue and profit might go up in the long term, because that customer is out giving testimonials to their friends.
But the employee isn’t sure, so she’ll seek help from your company policies and guidelines, or her supervisor, or perhaps from you. Maybe that’s one reason why you’re running around addressing a thousand little trivial decisions all day.
You’re frustrated, perhaps. You thought you’d captured this in the employee training, yet you’re still getting these kinds of questions.
Oddly enough, this might just be fixed if you measured the right things. What if:
· You knew that employees understood and internalized the employee training?
· Your employees knew that their personal success was linked more to customer satisfaction than to the daily sales total?
· You made a big deal of every customer-satisfaction success in front of the employees?
These are exactly the kinds of conversations I have with my clients, as we search for the right balance of measures which powerfully represent the goals of the business. Every company is different, because the goals are different.
Just don’t get too many measurements in place. Each one represents work and expense, and having too many sends the message that you’re not focused on anything in particular.
How do you measure your progress towards success in YOUR business?
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Do you ever look at the reports from your accounting software or are they meaningless to you?
A typical set of Financial Reports contain a lot of numbers but reading them can be daunting, hiding the critical numbers to success.
So what are the key numbers you should review that will drive your profit?
Revenue Growth %
This indicator generally gets a lot of attention and rightly so. The number though should not be looked at in isolation, revenue growth is OK but profitable growth is better.
Price Change %
This is the percentage by which the price you sell products either increases or decreases. Small regular price changes are easier to implement that one large change.
Cost of Goods Sold %
Cost of goods sold is the cost to get a product or service to market before taking into account overheads. This is an important number as it drives your profitability, a small decrease in COGS can have as much impact on Gross Profit as a large increase in revenue.
We often look at our overheads but we should review them as a % of revenue. If you can increase revenue while not increasing revenue your profit will increase, likewise if your overheads increase slower than revenue you will be more profitable. If your overheads rise at the same rate as revenue, you may be working harder for no more profit
This is the number of days on average it takes your customers to pay. The lower the number the better your cash flow. If the number is growing you cash will get squeezed impacting working capital.
This is the number of days on average you take to pay suppliers. Small improvements in this area by negotiating better deals can have a huge impact on your working capital position.
This is the number of days on average your stock is sitting in the store room or show room. This ties up cash impacting your working capital, so reducing days inventory by better buying or merchandising can have a big impact on your cash and profit position.
All these numbers are available from your Financial Reports, either from the Profit & Loss or the Balance Sheet. How many of you look at your Balance Sheet each month? Considering I have spoken to numerous small business operators who don’t look at their Profit & Loss report the number is surprisingly large.
Take the time to review the Financial Performance of your business each month, it will be worth your while and will help you trade more profitably.
Small Fish Business Coaching Sydney
A recent article by VECCI (Victorian Employer’s Chamber of Commerce and Industry) quoted ASICs figures showing that nearly 10,500 businesses entered external administration in 2011. Many were small businesses and analysts suggest the higher number of insolvencies is due to a crackdown from banks and the Australian Tax Office, which are pursuing unpaid debts and tax liabilities harder than before.
Business already pushed to the limit with overdrafts and loans are stretched as far as they can and with cash dried up, they have nowhere to go but call in the administrators.
The truth is that many business owners fail to understand or know their real Working Capital requirements and therefore expand too quickly, make bad business decisions or waste money with inefficiencies. This leads to additional requirements for cash and puts pressure on an already strained cash flow.
It’s important to understand the Working Capital requirements because understanding this figure will help understand how to improve it, and therefore keep more funds in the business.
So what is working capital? In a nutshell:
[Stock you have on the shelf +Work in Progress (labour and Parts) + Raw materials + Finished Goods] plus [Money customers owe you] minus [Money you owe your suppliers and other payables (rent etc)]
A simple way to monitor your Working Capital is to work it out as a % of Annual Sales.
For example: Let’s assume we buy 6 weeks of raw materials for production. (we buy an extra 2 weeks supply “just in case we run out”)
Assume Raw materials make up 40 % of our average sales.
1.5/12 X 40% = 5%
So for every $100 of sales we make, we need $5 to pay for the raw materials alone. Doesn’t sound like much but if we turn over $1mil that’s $50,000!. If we grow to $2mil turnover its $100,000 - suddenly that’s a significant amount of money.
Now let’s get efficient and only order exactly 1 month’s raw materials.
1.0/12 X 40% = 3.3%
So in that $1mil turnover business we now only need $33,000. That’s $17,000 we no longer need to fund buying raw materials and can be used to retire debt or for something else.
Going through the Working Capital “supply chain” we can calculate for each item as a % of sales
Calculate the Working capital as % of sales and know that number off by heart! It’s one of the most important number’s you should know after your Gross Profit margin.
- Raw Materials
- Work In Progress
- Finished Product
- Trade Payables
- Other payables
An example is shown below
Here our Working capital is 27% as a % of sales. We now know that if we suddenly receive an order for $100,000 we need $27,000 of cash to fund that order. This number becomes meaningful because we can ask for a deposit, stage payments, stage supply or a raft of things so as not to chew up our cash.
Now if we can make some basic improvements in your Working Capital “supply chain” (as shown in red) and suddenly our business has only 18% working capital needs as a % of sales – and the business has nearly $100,000 of extra cash it no longer has to borrow.
Now that’s impressive.
Of course using an experienced Business Coach can help calculate your Working capital as % of annual sales for your business, identify any inefficiencies and help you reach your goals of achieving great Cash Flow.
Small Fish Business Coaching Melbourne