Finances
How can I get my business tax returns done cheaply and accurately?
What is the best accounting package for my business?
Why are my accounts always so expensive?
How come there's never any cash, even though I'm paying tax so must be making money?
If my revenue is high, why do I not make any money?
Are our debtors better than the industry average?
Is inventory turnover better than the industry average?
Are our current assets greater than our current liabilities?
What if we take liquid assets out?
How is our credit rating?
Are payables up to date?
Do we produce and use cash flow forecasts?
Are there adequate shareholder funds for planned levels of business activity?
How would the business look to an external buyer?
Is our compensation at market rates?
Has our business been growing or declining for the last three years?
Do we review monthly management accounts?
What KPIs do we report?
Working capital
Are the days outstanding in receivables above or below the industry average?
Is inventory turnover above or below the industry average?
Is the funding of capital expenditure timed to match the life of the asset?
Do current assets exceed current liabilities after adjustment for illiquid items?
Cash flow
How good is the business' credit rating?
Are all payables up to date?
Are cash flow forecasts produced?
How effectively is actual cash flow tracked against projections?
How good a dividend flow to the owners does cash flow provide?
Funding
Are there adequate shareholder funds on the Balance Sheet to finance the current and future levels of business activity?
What level of additional funding is available (from shareholders or others) to finance business growth?
Business value
Has there been growth in the value of the business over the last three years?
Profitability
How attractive would our business look to an external buyer today?
Has the profitability of the business been declining or growing over the last three years?
Management reporting
Are reliable management accounts produced monthly?
To what extent are key performance indicators measured and reported?
Finances overview
To what extent are key performance indicators measured and reported?
Key Performance Indicators (KPIs) are metrics that facilitate the measurement of a business' critical success factors. KPIs are both financial (e.g. gross profit percentage, average value of a sale, revenue per employee), and non-financial (e.g. customer delight index, number of proposals won).
To determine KPIs start with the business vision and strategy. This will identify the critical success factors, which are the things the business has to get right to achieve its vision. Once critical success factors are defined, the development of KPIs is simply a measure of those factors.
Having defined the KPIs, research to get a feel for industry benchmarks in each area and summarize the KPIs and the benchmark targets in a management control plan.
TIME TO COMPLETE: 1-5 weeks depending on the size and complexity of the business and availability of external data.
Process
Step 1 - Review the business' strategic plan
The first stage in agreeing on KPIs for a business is to understand the vision and strategy. There is no point in measuring those things that do not contribute to realising the vision. Only metrics that are fundamentally important to the delivery of business goals should be considered in this exercise.
NOTE: If you do not have a strategic business plan, you might consider designing one - but don't let the lack of a plan prevent you from completing this project. You can come back to the strategic plan later. At this stage, simply outline your business goals and use those as the basis for designing critical success factors.
Step 2 - Based on the vision and strategy, identify critical success factors for the business
A critical success factor is something that the business has to get right for it to achieve its vision. These can be financial (e.g. strong cash flow) or non-financial (e.g. customer delight). Agree on five or six critical success factors as the basis for designing your measurement system.
It may be worth considering the Balanced Scorecard approach. This looks at measures in the four areas set out below with typical examples of measures used.
- Financial - ROCE, cash flow v actual plan, project profitability
- Customer - Satisfaction index, churn rate, market share
- Learning and growth - Team satisfaction, retention rate, revenue per employee, new product to market cycle
- Internal business processes - Tender success rate, quality performance, production efficiency, rate of returns
Step 3 - Identify the KPIs for the business
Determine the KPIs for the business. These KPIs should align with the goals of the business and are simply metrics to reflect the business' performance in achieving its critical success factors. An example - most businesses would have effective cash management as a critical success factor (without cash, the business is not viable). Feeding in to that KPI would be days held in accounts receivable. That would be a top-level KPI. You can break KPIs down into sub-KPIs - in this case, you could measure the number of customers lost as a result of an over-aggressive credit control policy to ensure you have the balance right.
Step 4 - Gather comparative KPI data on the industry
Research via web and benchmarking companies what industry data exists for the identified KPIs.
Step 5 - Establish a set of benchmarks for the KPIs
Review all of the data gathered from the industry research and establish benchmarks to use as a baseline in assessing the business' performance.
For those KPIs that you were unable to gather industry data for, use the business' historical data to determine the benchmark and measure constantly. Bring the KPIs together in an easy-to-use management control plan.
Deliverables
A written summary of key performance indicator benchmarks in all areas and a process for monitoring actuals against the benchmarks on an ongoing basis.
Do's
Link the KPIs to cash flow and profit forecasts and measure them regularly.
Design simple systems that allow you to report on KPIs without difficulty.
Consider displaying KPIs graphically for ease of reading.
Use it as a basis for setting realistic improvement targets.
Don't's
Focus just on financials. Non-financial KPIs can be just as important (e.g. new customers won, customers lost, the conversion rate of proposals won).
Suffer from paralysis by analysis. Keep it as simple to measure and manage as you can.
Assume it is a one-off exercise - it can no doubt be refined and improved with experience.