Setting of objectives in the beginning and regular evaluation to measure if you are still on track to reach them.
We will look at the following:
- Mission (why we exist)
- Values (what is important to us)
- Vision (what we want to be)
- Strategy map (translate the strategy)
- Balanced scorecard (measure and focus)
- Targets and initiatives (what we need to do)
- Personal objectives
The lifeblood of your business. Cash to a business, is like fuel to a car, without it you are going nowhere.
Businesses fail because they might be asset rich, but cash poor. If your money is tied up in assets and you can’t release cash to meet your regular commitments, your business might face liquidation.
We receive a huge order for producing our product and we then proceed to order the raw material. Due to being a new business we do not have credit arrangements with the supplier of the raw material and have to pay in cash. Raw materials arrive, we start production and two days later we try to contact the customer to arrange delivery of the first batch, but we can’t get hold of them. We send our sales person to their premises to find everything locked up, with a liquidation notice on the front door. We contact the supplier of the raw materials and they say since it is perishable they can’t take it back. We have our quarterly VAT return and monthly payroll, but now we can’t meet the commitments as we spend all the cash on purchasing the raw material. Eventhough we own the warehouse we operate from, and it is twenty times worth the cash we need to settle our commitments, we can’t sell it within 24 hours and even if we could, where will we operate from in future?
Key performance indicators can be set within the business and can even be used to measure against industry averages
10 Financial Indicators
- Profitability – Profit Margin
- Solvency – Current Ratio
- Gearing – Debt to Equity Ratio
- Work-in Progress – WIP Turnover
- Debtors – Debtors ratio
- Fixed Costs – Fixed Cost Ratio
- Variable Costs – Gross Margin
- Performance against Budget and Cost – variance reviews
- Costs as a % of Revenue – payroll, advertising & marketing
- Costs per employee – rent, stationery, travel, phone etc.
7 Business Performance Indicators
- Performance against SLAs
- Quality of product or service
- Response Rates – Inquiries to customer resolution
- Accuracy of reporting – Tax office reports, Payroll runs, etc
- Number of Compliance Breeches
- Service Availability metrics – up-time, speed, errors etc.
7 Business Generation Indicators
- Revenue breakdown by Customer
- Revenue Breakdown by Service/Product type
- Revenue Sources – lead generation information
- Employee Productivity – Sales per Employee = Annual Sales divided by average number of Full Time Equivalent Employees
- Client and Referral channels – social media, website, forums etc.
- New Business v repeat v referral ratios
- Number of Referrals by source
4 Employer/ee Indicators
- Employee Lifetime Value (ELTV)
- Employer Investment (ROI)
- Training Payback Period – total training (eduction) cost divided by total monthly benefits (eg increased sales)
- Profit per employee
NOTE these are not personal performance indicators and so they apply to the business overall, not any one staff member.
2 External Indicators
- Risk Levels – Reducing frequency and impact – consider, market, economic, geographic and demographic risks
- Resource availability – what scarcity is impacting inputs into your process
Where financial accounts are done annually and is looking at what has happened, management accounts are done monthly or quarterly, measuring performance against previously set targets.
Targets are based on budgets, this can be adjusted by doing new forecasts that takes into account the actual costs already accounted for, very much an evolving process.
At times one off projects need to be launched to accomplish certain objectives.
- Expansion of existing operations to accommodate increased production as a result of increased demand
- Increase in head count as a result of additional demand
- Replacement of obsolete machinery or computer equipment
Business health checks
As cashflow is the lifeblood of the company, this will be used as starting point.
A review of the management accounts where actuals will be measured against the budgets and how likely it is to meet budget expectations and perhaps implement a forecast to get a more realistic view of where it will end up at the end of the year.
A review of the balance sheet to see how working capital can be improved to enchance cashflow.
We can even implement some KPI’s to measure future performance and warn against deviation.
Budgets and forecasts
Budgets are set at the beginning of the financial period and can then be subsequently adjusted in the form of a forecast. Forecasts usually happen mid year to check if still on target. This will include past performance and then to adjust what was budgeted for accordingly.
In times of increased financial activity a further forecast aptly called a re forecast can be done, but the budget will remain as is, in order to measure the deviation from the original plan.
It can be a daunting venture as it requires more than just looking at budgets and how much is needed to fund the business or venture.
Main areas covered in business plans are:
- Explaining what the business is about
- Looking at the market and existing competitors
- Projected sales and how to market the product/service
- Look at the management team, their strengths and development requirements
- Current operations
- Financial forecasts
- Financial requirements
- Risk analysis
Executive summary where all the above are wrapped into a nice parcel
- Consists of debtors, creditors and stock (where applicable)
- Encourage customers to pay sooner or on time with added incentives
- Negotiate extended terms with suppliers
- Improve stock management to have enough for production, but not too much to become obsolete or get spoilt in the case of items with a limited life
The improvement of working capital will have a significant impact on cashflow.