2 minute read
Accounting Matters
CHRIS BURNS Complete Business Strategies
Over the last few issues we have stressed the importance of using your financial reports to manage your business rather than using them as a tax calculator. We have covered the purpose of financial reports, how they can help you improve your bank balances, and how you have almost unlimited flexibility in how the information is presented. Throughout the discussion we have mentioned Key Performance Indicators and how these are essential to your business objectives.
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So, what exactly are Key Performance Indicators (KPIs) and how can they help you achieve your business objectives?
KPIs can be anything financial or non-financial, what is important is the KPIs you choose are directly linked with your business objectives.
As an example, our objective may be to increase sales. We can simply measure and report our gross sales to monitor the result in that key area but what does that really tell us about our performance? What we really need to know as business owners is why we are or are not meeting our objectives.
Considering the sales growth objective, we can work backwards through our sales process and may identify that one way our sales increase is when we make more cold calls to potential customers. Therefore a better KPI could be to measure the number of cold calls we make. We may also wish to measure the conversion rate on those calls too. Measuring and reporting the actual behaviour we are trying to promote helps keep us accountable to do the things we believe are important to achieve our goals.
The result of the number of cold calls and the conversion rate can then be compared to our sales outcome to confirm the relationship between those KPIs and our sales targets. If we make more calls and have a better conversion rate the logical outcome is more sales.
Top 5 KPIs for Growing Businesses (not all will apply to all businesses or industries) 1. Debto r Days (This is number one for all businesses) 2. Number of Sales Leads Received 3. Number of New Customers (Conversion rate = Number of New Customers/
Number of Leads Received) 4. Custom er Satisfaction Level 5. Gross Margin (Gross Profit/Total Sales)
Summary 1. KPIs can, and should, monit or nonfinancial performance.
2. When KPI results are com pared to business results we can better understand our business and how our actual performance translates to our financial objectives.
3. KPI reports sho uld be included in regular management reports.
ABOUT THE AUTHOR Chris is a Chartered Accountant and a Director of Complete Business Strategies. During his 20 year career Chris has helped hundreds of clients improve their business outcomes and looks forward helping many more.
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