One of the most important truisms in business is that if you can’t measure it, you can’t manage it. And if you can’t manage it, you can’t improve it. This is one of the reasons why it’s essential to regularly review your enterprise’s hard data. So here are some of the most popular benchmarks great companies use to take their organisation’s temperature and build better balance sheets.
Retrospective figures provide hard facts and established patterns for your business, and provide insights into what you could be doing more of and areas you could change.
Above all, remember cash is king, and the cheapest form is cash generated by the business. You need to understand what drives sales, margins and cash flow to get the most from running your business.
1. Sales
Unless it’s increasing sales a business can stagnate and fail. So the very first measure an organisation needs to focus on is the sales pipeline. It’s essential to record sales that have been made, which products have been sold and to have a way of assessing upcoming sales opportunities.
Some of the key figures businesses should be measuring when it comes to sales include call effectiveness, traction, velocity, quality and change in win rate.
2. Margins
The gross profit margin represents the average gross profit on each dollar of sales before operating expenses (defined as gross profit divided by sales). This is an excellent way of analysing the profit of each product or service type.
The net profit margin tells you whether you’re making a profit after covering all your costs (defined as net income divided by sales).
The four main profit benchmarks every business should be measuring include gross, operating, pre-tax and net.
3. Cash flow
Running your business to optimise the production of cash brings an holistic approach to business management as it forces a business owner to focus on a number of cash drivers such as inventory management, accounts receivable and accounts payable.
When it comes to collecting data around these three points, a cloud based accounting software package delivers a real time review of your business performance anytime, anywhere and on any device. The data should ideally be reviewed weekly (sometimes daily), and tracked monthly against your forecast budget.
It’s beneficial to compare your performance metrics with industry peers. This information is usually sourced from the Australian Taxation Office’s web site. You should also talk through your performance with your accountant, who should also be able to help you with benchmarks.
Some of the important cash flow measures businesses need to monitor include forecast, actual, free cash and break even point.
Of course, financial benchmarks are just some of the measures great businesses should be assessing: non-financial benchmarks are equally as important, especially lead and lag indicators.
4. Lead indicators
The number of leads, or quotes given or enquiries are used to provide early warning of any peaks or troughs in your sales. Such lead indicators usually provide feedback on the success of marketing campaigns and sales conversion rates.
5. Lag indicators
This measure can provide a good snapshot of your levels of customer advocacy and satisfaction with the service or product you are providing. For instance Facebook, twitter and LinkedIn follower growth rates coupled with external customer satisfaction surveys can provide excellent data to the business owner.
Most business owners are passionate about fulfilling their dreams and making their business grow and it can be tricky to take a step back and review what’s actually happening in operations.
Working ‘on’, rather than ‘in’ your business is what sets apart good business owners from great ones. Simply set aside a little time each day to assess how things are going. Devoting time to instilling basic business disciplines will ensure you’re in control and the business is not running you.
Banjo’s top three vital cash flow measures:
Cash is king, which means it’s the one variable every business owner needs to be across. Here are three measures to help you understand what your existing and future cash flow position is.
- Operating cash flow: cash generated by day-to-day operations.
- Free cash flow: operating cash flow minus major expenses such as property purchases.
- Cash flow from financing: cash coming into and going out of the business from debt and equity finance.
