Indicators, they aren’t just used to tell other road users which direction you intend to take.
In business, you should use indicators to inform you of the good, the bad, or the ugly. When you build the right indicators then you’ll know what is happening and will be able to investigate why quicker.
Indicators are the smoke alarms of business.
If there is a fire, then you need an alarm to notify you of when things are going wrong.
Or if someone scores a six of the cricket pitch, whilst you may celebrate from the stands, but unless you see the scoreboard then you won’t know exactly how far ahead, or behind you team is.
Performance indicators therefore need to be used in conjunction with a scoreboard.
They are made to inform you how you are performing as a snapshot whereas the scoreboard tells you the detail.
In business, there are several different types of indicators, some lag and this is where most accountants focus, on historical results and Key Performance Indicators.
Other lead and this is where we focus our efforts with our clients, these are Key Predictive Indicators and we use the past to try and predict the future.
A good set of performance indicator will show both financial metrics, customer metrics, team and process metrics. Whilst these may seem like a lot to understand, just a few indicators will give you the insight that you need to make your business more profitable.
The catch is; the right indicators for your business may not be the right indicators for another business. Unfortunately you’ll need to research the right ones and determine which are the most appropriate for your business and importantly which ones are appropriate to help you meet your goals.
Indicators need to match your strategy first and foremost, not just your industry.
To help you, here are some simple indicators and definitions.
Financial Performance Indicators
Gross Profit: How much you make buy when selling your products/services. It is the profit that you make after deducting the costs associated with making your products or performing your services. If this is too low, then your profitability is high susceptible to sales volumes.
Working capital: Measures your cash availability when considering your short term debtors and creditors. Tie up too much is working capital and your financing requirements will grow as you expand.
Debtors days: Measures how long (on average) your customers take to pay you. If these are longer than you payment terms then you’re effectively giving a loan to your customers and unless you’re a bank, this is a bad thing to do.
Creditor days: Measures how long (on average) you take to pay your suppliers. To maintain supplier harmony you should adhere to these, but if they are shorter than your ‘debtor days’ then you’ll need to increase your short term financing as your business expands
Work in progress: the cost of the process to deliver your products or services that are partially completed. If this is too high, then you’re tying up profit for too long and will need short term financing.
Customer Performance Indicators
Customer Lifetime Value: the prediction of the net profit attractable to entire future relationship with a customer. This is important when growing as it gives you a financial metric that allows you to consider how much to spend to acquire a new customer – see Customer Acquisition Cost.
Customer Acquisition Cost: The cost of acquiring a new customer, i.e. total marketing spend divided by the number of new customers. This is the source of marketing mecca. If you know this and it is less than your Customer Lifetime Value then to grow your business all you will need is short term financing.
Net gain in customers: By assessing your net gain in customers per month you can assess whether you are meeting customers needs. This is particularity useful if you map seasonality trends to be able to compare like with like, .ie this December with last December. This is a good measure for growing company’s who need a simple metric.
Process Performance Indicators
Lock up: how much is ‘locked up’ in work in progress and debtors. In reality, it is the time that it takes you to turn the first hours of work into cash received into your office bank account. For each and every business this is critical to understand. You’re job as a business owner should be to minimise this!
Open enquiries: The number of open enquiries, this should include the number of days that they have been open. If they are open for too long then you risk losing business and not taking cash off the table.
Efficiency measure: these are more often than not used in manufacturing but are increasingly used in services and product sales. You can measure how many sales are made per day, how many customers are served per hour or how long your systems are up and running. When you break things down into a simple metric like this then you can motivate your front of house team more.
People Performance Indicators
Employee turnover: take the number of employees who have departed the company and divide it by the average number of employees. If this is high then spend time examining your workplace culture, employment packages, and work environment.
Response to open positions: To build the best business, you need the best people. Attracting the right people is therefore critical. If you have a high percentage of qualified applicants apply for your open job positions, you know you are doing a good job maximising exposure to the right job seekers.
Employee Satisfaction: Happy employees are going to work harder—it’s as simple as that so measure your employee satisfaction, often.
If you need help to define the right metrics, then get in touch.