Business owners are often occupied with the operational requirements of running a business and as a result, fail to put the required effort and focus into strategic tasks such as monitoring business performance. This is despite often putting effort into developing key performance indicators (KPIs), budgets and targets at the beginning of the financial year. With the new financial year, it’s a great time to consider reviewing the way you develop your targets so that they’re measurable, will drive growth, and can be easily monitored throughout the year.
Setting up a complex set of monthly reporting metrics might be tempting, however if reviewing these metrics is too time consuming, chances are you and your team will abandon the process quickly. Keep your metrics simple initially to get everyone used to the process. Then, add new items as necessary. You’re far better off regularly monitoring a simple set of KPI and reports rather than not reviewing anything at all. Start with simple but critical KPIs which are specific, measurable and quantifiable, and track your progress against these first.
What metrics could you consider?
Below are some examples of key performance metrics for revenue, growth, productivity and cashflow. Start by thinking what metrics indicate your business is performing well. Once you’ve identified these and tracked them for some time, you’ll have a benchmark against which to set targets.
Revenue: Monitor your sales and/or income for a period – whether that’s monthly, quarterly, etc – against your budget, against last period and against the same period last year (year-on-year). You could consider breaking the revenue targets by key product groupings or explore the KPI further later on by reporting sales by division, location or even currency.
Growth: Monitor movements in number of clients for a period against targets. Or, if more appropriate, you could measure dollars spent by clients for the period and compare with your target as well as the spend last period and the spend that occurred year-on-year.
Productivity/efficiency: A good indication of productivity is to measure your employees hours (measure of input) against fees issued or items produced (measure of output). This of course depends on the industry you operate in.
Cashflow and working capital: Monitor your debtors days, creditor days, and stock turnover. There are many KPIs that fit into this category subject to the industry you operate in, but the main point is to monitor the items that affect your cashflow the most.
Most accounting software, including Xero, Quickbooks, Netsuite and Reckon, can produce reports against your KPIs with little effort, saving an enormous amount of your time. In fact, a lot of financial KPIs are already built into these programs.
Sharing the task and increasing accountability
If you are the only one in your organisation tasked with preparing and reviewing your reports, you might find yourself skipping this task due to the general operation of the business taking precedence. It is often a good idea to share the task and include management or other team members. Bringing staff and management along this journey has been proven to increase engagement and morale. They will also gain a better understanding of the business which means they’re better placed to support the business in achieving its strategic goals.
To ensure consistency with your reviews, you could set fixed and regular times in the diary for this process. For example, set the second Wednesday of every month at 4pm to present and review your reports. Invite others to attend the meeting. You can invite members of your team and external parties such as your accountant, shareholder, business partners, etc. This will increase the amount of feedback and enable more diverse feedback from those with different skillsets.
In summary, as the old saying goes, “What gets measured, gets managed”. If you’re tracking your progress consistently against key performance indicators and measuring your spending against budgets and cashflow forecasts, you’re better able to identify discrepancies and manage outcomes.