Any sports enthusiast who is familiar with ball games like cricket, football, golf, hockey or tennis, knows that the advice, ‘‘Eyes On The Ball’’, bears a cautionary tone. And every ball player knows that you can only strike a winning shot when you have your eyes on the ball. Which is why players in virtually every ball game is told to know the position of the ball at all times.
In the world of business, for the Small Business Owner, Keep Your Eyes On The Ball means paying attention to the business. The Small Business Owner is thus advised to master the numbers that reflect the wellness or ill health of his or her business.
While poring over the numbers that run a business may not be the most exciting thing that a Small Business Owner wants to do, it is one thing that he or she must do in order to build a profitable business. After all, as the saying goes, it’s what gets measured that gets managed. To know what to measure and what to manage, the Small Business Owner needs a dashboard of the Key Performance Indicators (KPI) of the business.
A KPI shows the effectiveness of the business in achieving a key objective. It indicates whether the business is succeeding as it strives to hit the target set for a given indicator. KPIs generally focus on the overall performance of the business, and the internal processes in such critical departments as human resources, production, sales, marketing, etc. KPIs also trigger insights for the Small Business Owner to proactively tweak the under-performing areas of the business.
Here are 10 KPIs that the Small Business Owner must track, measure, analyse and manage:
- Operating Cash Flow: The Small Business Owner must monitor the Operating Cash Flow of the business, as this impacts the ability of the business to meet its routine operating expenses. This KPI equally reveals whether the business is generating sufficient cash to support the investments needed to run and grow the business.
An analysis of the ratio of operating cash flow in relation to the total capital employed by the business indicates the financial health of the business.
- Working Capital: This is cash immediately available to the business. It is calculated by subtracting existing liabilities of the business from its existing assets. The elements that determine the working capital of a business include cash on hand, accounts receivable, short-term investments, accounts payable, accrued expenses and loans.
Working capital represents funds available for running the business, and the extent to which available assets of the business can cover its short-term financial liabilities.
- Current Ratio: While working capital subtracts liabilities from assets, current ratio divides total assets by liabilities. The result gives an indication of the solvency of the business, and its capacity to meet its financial obligations as and when due.
- Debt-Equity Ratio: Debt to equity ratio is calculated by comparing total liabilities of the business with equity shareholding of its owner(s). This ratio shows how the business is utilising its shareholder(s) funds in growing the business, and how much the business owes its creditors.
A high debt to equity ratio points to dominance of debt finance over equity finance.
- 5. Revenue Versus Budget: This KPI compares the actual revenue of the business against its projected revenue. This can be tracked for specific lines of the business and/or for the entire business. A variance analysis of the revenue versus budget numbers helps the Small Business Owner to understand the financial performance of each department of the business.
A comparison of the projected and actual operating budget totals enables the Small Business Owner to make more accurate budgets for the business.
- Expenses Versus Budget: A comparison of actual expenses and budgeted amounts helps the Small Business Owner to spot budgeted expenses that went off, or stayed on, track. This knowledge helps to improve future budgets.
A variance analysis of total projected and total actual expenses helps the Small Business Owner to appreciate the relationship between the operations and finances of the business.
- Accounts Payable Turnover: Accounts Payable Turnover shows the rate at which the business pays its suppliers. This ratio results from dividing total costs of sales by average accounts payable during a given period.
A decline in accounts payable turnover usually signals an increase in the time it takes for the business to pay its suppliers. Such trend needs to be reversed to keep the business in good standing with its vendors.
- Accounts Receivable Turnover: Accounts receivable turnover measures the rate at which the business successfully collects payments due to it from its customers. It is calculated by dividing total sales by average accounts receivable over a given period. This number calls for corrections in managing receivables of the business, in accordance with the credit policies of the business.
- Inventory Turnover: Actual turnover changes as inventory flows in and out of the production line. Inventory turnover tracks the average inventory of the business sold in a given period. It is calculated by dividing sales by average inventory during a given period. It also signifies the sales strength and production efficiency of the business.
- Return on Equity: Return on Equity measures the net income of the business against each unit of share ownership. A comparison of the net income and total valuation of the business reveals whether the net income is appropriate for its size.
The return on equity ratio underlines the profitability of the business, and tells if shareholders’ investments are being maximised to grow the business.
Now that you have the Key Performance Indicators of your business, you must learn to keep your eyes on your financial dashboard. You must focus on how the KPIs impact the business, and apply your understanding to policies, processes, personnel and products that can improve the business.
Contact Us Now or drop me a line at firstname.lastname@example.org if your business needs help to track and manage its Key Performance Indicators.