The focus of this article is the idea of an entrepreneurial business check-up.
Is it important to have standard measures or Key Performance Indicators (KPI’s) that show the business is doing just fine, or starting to show stress and possible fracture, or is already in a decline mode?
What some useful leading indicators that reveal that there are areas of the business that need your attention?
It is usual and good practice for Entrepreneurs and CEO’s to review the business financials on a monthly basis, that is, at least the Income statement and Balance sheet.
Its also typical to review Daily/weekly/monthly sales KPI’s, as well as sales by customer and some look at customer profitability which is really useful. Use of CRM software is recommended to manage the relationships with your customers and potential customers. It enables you to streamline and track the progress of the sales cycle from the first contact with a potential customer, through nurturing of the prospects, to the final sales and sign-on as a customer.
These days it has become a business development imperative to review your website hits, and measure and get reports on your digital marketing effectiveness, including conversion to customers. The point is that for each business there will be different KPIs and it is important to identify and describe accurately those that are critical to achieving your goals.
However, if you had to pick 3 really important areas to focus on that can help you pick up signs of any trouble in your business, here they are:
1. Sales Reports and customer development
- Sales to your existing customers; daily, month on month, year on year and trending up or down?
- What do the top 10% of customers account for in total sales? Is this measure changing, if so why, and what are the consequences?
- What is the Gross or Contribution margin per customer, compared to previous periods? In our experience not many businesses measure customer profitability, but this can provide strategic insights and new direction in terms of pricing and discount, promotion, and whether to focus more on winners (customer is profitable and growing) or cut back on losers.
- What % of your sales is represented by new business? This is really important, as long-term business health depends on the capability to “create and keep a customer” – Peter Drucker.
Here are the salient measures that are necessary to monitor the business.
Gross Margin and Net Income/profit. In dollars and as percent of sales vs Last month/ Last year. Some go further and look at other key measures needed in that industry or business, for example in manufacturing, they review the scheduling and yield efficiencies, costs per unit, or cost per labour unit, work in progress, total cost of goods, and much more. They may also look at Inventory turns, raw and finished good inventories, and back orders.
Cash Flow. Is your cash flow positive, in other words, are you bringing into your bank account more money than you are spending every month? The money that you expense every month in running the business is offset against money coming in along with
Burn Rate. For a new business prior to generating positive cash flow, if this outflow is larger than loans or access to capital, this is called the burn rate. The burn rate is used to calculate how long they will last (in months) before money runs out. It happens.
3. Human Capital and Culture
This may be a surprise, and it can be more difficult to measure everything here on frequent basis, but management has a duty to ensure that the human capital deployed, and the values and culture in the business, are in good shape.
Successful organizations have employees that demonstrate the following:
- All employees in the organization have clear roles and accountabilities.
- They have the resources necessary to do the job
- They receive training, coaching and support to be better in their jobs
- They receive feedback, and ongoing mentoring from their manager
- Employees share the same openly stated Values.
It is possible to measure employee satisfaction and engagement, if you would like to know more please contact us.
In summary, a KPI based process of regular reports on the salient measure in a business it could enable that business to head off potential problems, develop corrective strategies and actions but most of all, be a high performing organization.
By John Holland