It was Lewis Caroll that said, “If you don't know where you are going, any road will get you there.” Click to tweet
Many small business owners have already learned that if you don’t have both short-term and long-term goals that will help your business get to the next level, you will spend years (if you’re lucky), spinning your wheels, coasting on bare minimum profits, and more than likely getting left in the dust by innovation, waning consumer interest, and competition.
So how does a small business owner keep her eyes on the prize (sustainability and increasing profits) and make sure her business is growing and not dying?
A savvy business owner has an accurate idea of trends and sets business goals and objectives that are used as on-going planning tools. These goals and objectives should be well-defined and tied to key performance indicators that identify if the business is meeting the goal or is falling short.
What are Key Performance Indicators and why are they important?
“What gets measured, gets managed, “ Peter Drucker. Click to tweet
Key performance indicators (KPIs) are performance measurement tools that help businesses define and evaluate progress toward goals or objectives. These quantifiable measures are used to assess or compare performance in terms of meeting these goals.
When considering measuring success, most business owners immediately start quoting sales goals and projected profits. While it is great to be able to able to measure solid profits for your small business, profits are only one of the many factors affecting your company’s balance sheet. It is also critical that other performance indicators are used to assess your business’ success in reaching its goals. In both the long and short-run, tracking relevant KPIs can help you make important decisions about your company’s growth and development, click here for a more exhaustive list.
Measuring your small business’ performance (and using KPIs) will allow you to easily review your performance when evidence is compiled and interpreted against specific targets. KPIs should be evaluated on a regular basis (I suggest quarterly or at least semi-annually) in order for trends to be identified and tracked based on select indicators.
And here's a tip: you don't have to re-invent the wheel! Unless you are in a strongly innovative, cutting-edge industry, more than likely someone has already gone before you and identified best practices and benchmarks for performance in your company's given field. Be mindful when you are doing the research and the time spent will pay for itself when you are on track to achieving each of your goals. But if you honestly do not have the time or the wherewithal to make the administrative investment into your business, you should consider hiring a consultant that can. Measuring performance is too critical to allow it to fall by the wayside--it can be the bottom-line difference between a company that excels, and the company that was hot last year but soon went bankrupt.
If you aren't sure where to start, here are 3 of the most critical (and basic) performance indicators that every small business should measure:
1. Cash Flow Forecast
Cash flow forecasts let businesses assess whether their sales and margins are appropriate. To make your cash flow forecast, add the total cash your business has in savings to the projected cash value for the next four weeks, then subtract the projected cash out for the next four weeks. This indication allows business owners to identify potential problems, anticipate surpluses or shortages, and planning for taxes or upcoming loan applications.
2. Gross Profit Margin as a Percentage of Sales
No business will be operating for long if it is paying more to suppliers and production costs than it is netting in sales each month from customers. Gross profit margin as a percentage of sales is an expression of total profits as they compare to revenue.
Here is an equation for calculating Gross Profit Margin as a percentage of sales:
(Gross Profit/Sales x 100) / Sales
The benefit of tracking this performance indicator over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers. As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a business is overspending on its supplies. Owners would need to reduce overhead costs or increase prices on goods and services to compensate.
3. Revenue Growth Rate
The revenue growth is the rate at which a company’s income, or sales growth, is increasing. To calculate revenue growth rate, begin with your business’ total revenue for the current year. Then, divide current revenue by total revenue from the previous year to find the rate of growth.
By calculating revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing. Use it to make any necessary changes to stay profitable.
The Bottom line:
A smart entrepreneur plans accordingly and has an understanding that it is vital to have an accurate idea of the daily, weekly and monthly numbers and financial trends in the company. If you lack the financial skills, hire a small business consultant, but still stay on top of how your business is doing.
Although it may seem tedious and time consuming to track your business’ performance (as an entrepreneur you may just prefer to focus on the “fun” stuff, and if so that is a BIG and costly mistake), remember, planning for the future is easier when you have the numbers and the results to back you up.
To hire Pure Religion Coaching and Consulting as your small business coach-consultant, click here.