Make really Profitable decisions use these 8 Key Business Indicators

Imagine if you had two pages with graphs and charts of your business information and insights, in front of you right now… How much difference would that make to you?

Grab your most recent Income Statement and Balance Sheet (for Aussies this will be available from your last BAS workings), then set-up your own Simple business Dashboard using these 8 really easy stats and generate actionable insight to improve your results.
You can regularly measure, monitor, and see your own business trends progress – this will convert your data into GOLD.

Step 1 – make sure your basics are up to scratch

Tidy up your Accounts to make them most useful… For your new Dashboard to work well your Income Statement should specify fixed and variable costs.
Using this 7 point checklist can help.

Step 2 – Use the Basics to distill great Information

8 Key Business Indicators – meaningful information so you can understand your business performance and results AT A GLANCE…make it clear!

NOTE: these may or may not be your only KEY Performance Indicators (KPIs). KPIs are the primary measures used to assess how you are progressing towards your targets – and these 8 Indicators are not necessarily focusing on any specific performance goal; they are more like taking the your business’ pulse – checking status rather than progress. (for more on KPIs see Top 27 SME KPIs ‘Must Haves’ for business performance reports.)

  • Business Status Indicators
    1. Profitability – Profit Margin = (Total Revenue less Total Expenses) divided by Total Revenue.
      SHOWS how much profit you make from every dollar you spend.
      TARGET – varies from business to business, the lower your volumes the higher this needs to be, but it should average a positive number indicating ongoing profitability.
    2. Solvency – Current Ratio = (Current Assets less stock) divided by (Current Liabilities less Overdraft)
      SHOWS how much cash you have available to pay your “everyday” costs and debts.
      TARGET – this should sit at 150% to 200% – anything below 100% indicates impending insolvency risks.
    3. Gearing – Debt to Equity Ratio = (total liabilities) divided by (shareholders equity plus reserves)
      SHOWS how much borrowings are supporting the current business, trends can indicate if the borrowings are delivering profits.
      TARGET – The higher this number the worse the business status – banks will generally only consider approving a this ratio is below 90% (generally they look for 75% or less).
  • Business Performance Indicators
    1. Inventory – Inventory Turnover = (Stock x 365) divided by Annual Sales (in some cases, Work-In-Progress replaces Inventory)
      SHOWS – how long you “sit on” and/or store goods or services before they are sold.
      TARGET – varies from business to business, but the smaller the better ie the quicker you sell and process the less storage and holding costs incurred and the more you sell.
    2. Debtors – Debtors Days = (debtors x 365) divided by Annual Sales
      SHOWS an average of how many days it takes your debtors to pay you
      TARGET – varies depending on your debtors terms – the closer to zero ie cash in hand on sale, the better.
    3. Fixed Costs – Fixed Cost Ratio = Fixed Costs / Total Costs
      SHOWS – how much of your total expenses are related to administrative and overhead costs. Every dollar spent here doesn’t directly correlate to extra sales revenue, but may be necessary to maintain the administrative capacity within the business, such as ability to handle inquiries or manage the finances and payroll.
      TARGET – as low as possible, whilst still retaining an acceptable level of administrative services.
    4. Variable Costs – Gross Margin = (Annual Sales less Annual Cost of Sales) divided by Annual Sales
      SHOWS the amount of each sale, after deducting the costs of sales, available to cover fixed costs and generate profit.
      TARGET – the higher this number the better off your business is – with a maximum of just under 100%.
    5. Employee Productivity – Sales per Employee = Annual Sales divided by average number of Full Time Equivalent Employees
      SHOWS – an average of how much in sales, on average, each staff member is contributing to your business.
      TARGET – the higher this number the better off your business is.

If you keep track your answers month to month you will be able to see trends developing. Use this information to:

* quickly identify variations from the norm and take action to amend
* set targets for your team and influence the outcomes
* make improvements to your business and see if the impact is what you are wanting

Never again will the fact that you don’t have large in-house IT department or a big consulting budget prevent you from getting the right information, at the right time, to enable you, and your managers, to make informed decisions and then take action to build a better, stronger business.