Assume for a moment you’ve just been given a business. It’s the 11th of the month and the monthly sales so far are $52,000.
Is this a good month?
Unless you’re running on gut feeling alone, you won’t be able to answer, because you don’t know the details of the business.
Now look at your business, could you honestly say what your sales should be at each date in a month? Do you calculate your sales daily? Do you know the targets you need to make? Or what the outgoings will be that month and the shortfall you will need to make up? Don’t worry, if the answer is no, you’re not the only one.
The Importance of Key Performance Indicators (KPIs)
KPIs are critical across your business, but no more so than in your financials. They are the critical numbers that need to be maintained and measured daily, weekly, monthly, quarterly, annually or on a project-by-project by project basis, to help you monitor and predict the overall health and efficiency of your overall operations.
They can help you make informed decisions about your business regarding budgeting and resource allocation, help you avoid being blindsided by poor performance and help you detect inefficiency or even fraud.
Your 7 Key Numbers for Strategic Growth
So what are the key numbers you need to monitor? Here are the seven critical numbers you should know about your business:
Your sales can tell you a lot about your business. What products are trending, which are decreasing, which maintain the same level. They can help you monitor seasonality and the performance of your marketing campaigns. However, it is important to remember that they should not be looked at on their own. They should always be monitored alongside the bottom-line performance. After all, it does not matter if your sales are steady or even growing if your margins are shrinking.
2. Cash Flow Forecasts
Your cash flow calculation is cash in the bank, plus cash coming in over the next number of weeks, minus cash going out. This outgoing cash could be electrical bills, rent, product acquisition, staff salaries etc. over that same number of weeks. The results will allow you to see if there are any shortfalls in that time period and give you time to find the money to pay those bills.
The more often you monitor your cash flow the better. Weekly or monthly monitoring is best, especially during a growth spurt in your business.
3. Debtor Days Outstanding
Debtor days outstanding is a calculation to help you estimate your average collection period on the sales of your goods or services. If the average collection period increases then this could have a big impact on your cash flow and ability to pay your own bills. This calculation allows you to monitor those increases and decreases and make amendments before it impacts your business too much.
To calculate your debtor days outstanding, divide your Accounts Receivable by your Total Sales and multiply by 365.
4. Creditor Days Outstanding
This is the average number of days it takes you to pay your suppliers. This should be monitored alongside your debtor days and should be equal or higher than your debtor days. This will help you keep money in your bank account for longer. If it is lower, you will need to take action and reduce the number of credit days you allow your customers, and negotiate a longer payment term with your suppliers. This is a critical area where many small businesses miss the mark. Without a dedicated person to monitor your numbers, it can cause big cash flow issues and cripple a company.
To calculate your creditor days outstanding, divide your Accounts Payable by Total Purchases and multiply by 365.
5. Inventory Days or Stock Turnover
Do you know the average amount of time your inventory remains in your store or warehouse? Slow moving inventory costs money and runs a risk of becoming outdated and therefore a cost to your business. By monitoring this number, you will be able to see which products are popular and which are not, and then take action to understand why they are not popular and what they should be replaced with.
To calculate your total inventory days or your stock turnover, divide your total inventory by your total purchases and divide by 365. The lower the number the better it is for your cash flow as it means that stock does not stay on shelves for long.
6. Gross Profit Margin as a Percentage of Sales
This percentage is a key indication of the viability of your individual products or services. It indicates the difference between what you charge your clients and what you pay your suppliers. By monitoring the percentage, you can discover if your overheads are too high or if your prices are too low, and amend your business model. Prices of goods and of your employees time can vary a lot over a year, therefore the more frequently you monitor this number the better.
To calculate your gross profit margin as a percentage of sales subtract your total revenue from the cost of goods sold, then divide by the cost of goods sold and multiply by 100.
7. Profit Before Income Tax as a Percentage of Sales
Your pre-tax income includes the cost of goods sold, operating expenses, as well as interest expense, allowing you to take into account your use of leverage (debt). Ideally this number should increase over time. While a flat line maybe acceptable for a certain time period, a decrease can be a warning sign of further losses in the future.
To calculate your profit before income tax as a percentage of sales, divide your profit before tax by your revenues and multiply by 100.
Your New Morning Coffee Routine
While all these numbers are critical to monitor over the year, choose between three and five numbers to monitor on a daily basis to help you understand your business more. Make it part of your morning coffee routine. It will give you a boost in the morning to know what to concentrate on that day.
And, don’t forget to share the numbers with your team. Whether that’s part of a daily huddle before the working day, brainstorming new projects of part of your long term strategic planning, it will help your employees know where your business stands now and how they can help make those numbers better. They can also be used as employee KPIs, offering rewards to drive business growth and help you achieve your business goals.
Want to Learn More About Your Financial Statements?
Attend our Business Finance seminars by Bill Erichson. Learn the language of balance sheets and income statements and understand how to make your earnings work for your business.