Key Performance Indicators (KPIs) are part of sound financial management. They are not “dirty words” as some in the small business community perceive them to be (“My business is too small” or “Don’t have the time”).
KPIs are simply the information business owners need, to track what is happening in their business, in order to make informed decisions. Because small business owners don’t have anyone to rely on to ring the alarm bell, they need KPIs even more than large and well staffed companies.
The following KPIs are simple and easy to monitor:
Sales
You would be amazed how many small businesses do not have access to an accurate sales figure. Sales are the first indicator of the business trend (up, flat, down).
Gross profit margin as a percentage of sales
This compares the prices you charge to your clients with the prices your suppliers charge you. Increase is good; flat could be okay; decrease is an alarm bell.
Profit before tax as a percentage of sales
Ideally this figure should increase; it could be okay if it remains flat, but a decrease is definitively an alarm bell.
Cash flow forecast
Calculation = cash at bank + cash in over the next four weeks – cash out over the next 4 weeks. This calculation done for each of the four coming weeks will tell you if you have enough money to pay your bills at the end of the month.
Debtor Days
Calculation = accounts receivables / sales x 365. This tells on the average, how many days it takes for the money to reach your bank account after you have issued invoices. A decrease is good; an increase is an alarm bell.
Creditor Days
Calculation = accounts payables / purchases x 365. This tells on the average how many days you take to pay your suppliers. Monitor that figure and compare it to the debtor days. Ideally, creditor days are equal or higher than debtor days. If it is lower, you need to either improve your collection, or negotiate better payment conditions with suppliers, or you may have a cash flow problem (Watch!).
Inventory Days
Calculation = inventories / purchases x 365. This tells you on the average, how many days the goods you purchase stay in your warehouse or on your shelves before you manage to sell them to your clients. The lower, the better.
Number of customer complaints as a percentage of number of sales
Your customers will stay with you and buy again if they feel looked after, so measuring the number of complaints and taking actions to reduce that number helps to build a sustainable business.
The above indicators are easy to implement and monitor. Spending just 20 minutes every month to review them would greatly improve your opportunities to detect potential problems before they arise.
It is like driving a car: if you are doing 50 Kph at 9:00 am in a school zone, you need to slow down; if your fuel gauge is approaching empty, you need to start looking for a petrol station. Why would you do without them?
Source: Eric de Diesbach www.informgroup.com.au
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