Understandable or not, it’s a mistake however. The fact is, profits are only one small piece of the puzzle for SMBs looking to grow a company in the long term.
“KPI numbers can seem like a bit of a foreign language to many,” says trades advisor, mentor and coach, Andy Burrows.
“If tradespeople want to improve and grow their business, there are key principles they need to focus on. It’s really not too difficult, it’s just a case zeroing in on what’s important and then changing some of your behaviours”.
Burrows says that most electricians have a ‘gut feel’ when there’s something wrong, but lack the objectivity that comes with a better understanding of their key performance indicators.
“You need to ask yourself: What gross profit percentage are you achieving? Are you generating a decent rate of return? What revenue figures do you need to achieve to make the business work? Because that’s how you measure success.”
The only way to truly understand the health of your business is by understanding the metrics most relevant to it. Done well, you’ll have valuable early warning alerts about potential problems and accurate indicators of the health (or lack thereof) of your business. Ignored, you might find yourself working too hard, for too little return on a business that isn’t sustainable.
The good news is that a basic analysis of the fundamental KPIs isn’t necessarily difficult, and with the right knowledge, some simple advice, and the use of some uncomplicated tools, you can get a handle on the numbers most relevant to you.
First things first
The first step is deciding what you need to measure. Every business is different, as is every business owner, so the stats that matter most won’t be the same for everyone.
Your accountant is an excellent place to start when deciding where best to spend your time. They’ll look at your industry, the size of your business, your particular goals, and where you are in your company’s life cycle.
Some key metrics they’re likely to recommend tracking:
- Cash flow
- Debtor days
- Profit per hour
The important thing is to understand why you’re following any particular metric and what those results actually mean for your business. Again, use your accountant or advisor to help you understand what you need to know and why.
Getting a handle on your cash flow
- The total amount of money being transferred into and out of a business, especially as affecting liquidity.
While important metrics can vary from business to business, cash flow is a constant. Without cash you’re out of business so being able to anticipate when a bill is likely to be paid, more or less, is crucial.
Cash flow forecasting is important to identify shortfalls in cash balance, particularly as an early warning system for such shortfalls. Having a good idea about your upcoming surpluses or shortages gives you planning confidence and ensures you can pay your suppliers and employees.
So how’s it done? It’s essentially a case of measuring ‘cash-in’ and ‘cash-out’, but that can be more involved that it might sound and working out the numbers with a spreadsheet can be tricky. An easier way? Let your advisor or coach figure out this number quickly (and they will, especially if they’re using a for-purpose debtor and cash flow management tool) and move on.
Understanding your debtor days
The average number of days your customers are taking to pay you, calculated by dividing debtors by average daily sales.
Debtor days are the ratio of how quickly your debtors are settling their invoices, or the difference between when you issue an invoice and when the debtor pays the invoice.
The amount of debtor days you’re facing will depend on several factors: Industry expectations, any early payment incentive schemes you have in place and how effectively you’re chasing overdue invoices. While the calculation is fairly straightforward (debtor days = debtors ÷ sales x 365), actually arriving at the final figure can be fairly labour intensive, so again, a skilled advisor, coach or accountant is likely your best bet.
Once you’ve established what your debtor days figure is, you can then compare it to your industry average to see how you fare.
Net profit per hour
- Net operating profit / total revenue producing or billable hours
One of the biggest questions that you need to answer is this: “Am I profitable?” It is, very much, the ‘bottom line’ for a business and the measure of whether what you’re doing is successful. You answer this by establishing your net profit per hour (net operating profit divided by total revenue producing or billable hours).
“The biggest mistake I see people make is not going back and analysing how profitable the jobs they’ve done have been, says Burrows.
“They’re so busy, they’re on to the next thing and on to the next thing, and not going back and asking ‘What is the most profitable kind of work I’m doing?’”
“It’s easy to get really busy doing lots of jobs, and accepting jobs that you possibly shouldn’t. That’s a case of not having very good ‘filtering’.”
Filtering your clients is the secret to finding out which customers are simply not worth having. Either because they cost you more than the revenue they bring in, they consume a disproportionate share of time and money, or they create stress by paying late.
“It could also be jobs that are geographically problematic, i.e. wasting time in-between jobs. It might be taking jobs from people who are really super fussy and constantly micromanaging you. Filtering your clients is about getting to that point where you can ask ‘Who is the best type of client for me to proactively chase?’”
“And you’re only going to find that out by doing analysis.”
Some aspects of your business will always be out of your control. An understanding of your key performance metrics, knowledge of what they mean and grasping how they will help you reach your goals is something you can always control.
Taking the time to understand them — and seeking help to understand them if you need it — will help you maintain your business’s performance.
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