“So how’s business?”
Well what should we look at to answer this question? Our financial accounts, our management figures from Xero, last week’s sales figures, or
our bank balance?!
We can get answers of sorts from all the above. However, there is a better way to measure performance quickly. Develop some key performance indicators for your business (KPIs). You don’t need help from your accountant, just look at some simple to measure statistics that will be in front of you every day.
If you are in retail or services you can simply divide the number of sales transactions into your daily/weekly/monthly sales. This gives an all important average revenue per customer. Once you start to measure this frequently the next question will be how do we increase it? This can be selling more items with each transaction, selling higher priced product or importantly discounting less. All of these will drive the revenue per customer up. You will not have to wait for your accountant to tell you that this is good for your business. More profit will be coming through for sure.
For most businesses, wage and salary costs are a big issue. You should measure them as a percentage of your sales, by week and by month. The key indicator we want to see is the percentage trending down. This is an important measure of productivity. It can be affected firstly of course by sales increasing, and secondly by good control of hours worked. Ideally if both are happening at the same time profit growth is assured. Conversely if you see the percentage increasing then what is the reason? You then need to adopt some plans to control payroll cost over time especially if sales are slow.
It is important to remember that these type of measures have real time effect if you review them frequently. If you just wait until your accounts to be prepared it is too late to do anything about it for that period. You are left with reviewing historical information. Develop some KPIs now if you are not doing so already. They are a live measure of how the business is performing right now! They will make finding the answer to the question we started with very quick and accurate.