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Make really Profitable decisions use these 8 Key Business Indicators

Imagine if you had two pages with graphs and charts of your SME information and insights, in front of you right now… How much difference could that make to your profit this year?

Just because you’re an SME, and don’t have large in-house IT department or a big consulting budget, don’t let that prevent you from getting the right information, at the right time. 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 so you can start making informed decisions and taking action to build a better, stronger business.
As you regularly measure, monitor, and see your own business trends progress on your dashboard – you are converting your financials into GOLD.

Step 1 – make sure your basics are up to scratch

The Extra Basic – Tidy up your Accounts

Regardless of how you do your accounting, having accurate Profit & Loss and Balance Sheet Reports is imperative to profitable decision making. Ensure every dollar and activity is found, and recorded, accurately. If you put rubbish into your Accounts, only rubbish can come out on your Dashboard. (Or as the saying goes, ‘Garbage In, Garbage Out!’). So we are starting by assuming your business systems are currently processing accurate and timely data. (If not start by fixing up that part quick!)

The Basic – Understand your Expenses

Unless you sell services – for your new Dashboard to work best your Income Statement needs to specify Direct and Indirect costs separately. Just in case this needs some clarification:

  1. Direct Costs (also called: Cost of Goods Sold or COGS)

    The term “direct” describes the relationship of these costs to goods produced and/or sales made – the concept is that there is a “direct” correlation between a sales and this cost. This may not be on an exact 1:1 relationship (1 more unit sold = 1 more unit of cost). Consider a tele-sales business re-selling steak-knives for a profit. For every sale there is the direct cost of the steak knives and the cost of the shipping.
    Direct Expenses usually only appear in Income Statements of businesses which are manufactures or retailers – supplying stock – and refers to expenses such as raw materials, inventory, delivery etc. Service businesses generally do not allocate any specific costs to Direct Expenses as they cannot hold, nor sell, their staff as “stock”.

  2. Indirect Costs (also called: Operating Costs, General Costs, Overhead costs, Overheads)

    Indirect Costs are incurred to keep the business running; all the overheads and support functions that need to be paid for regardless of whether you have customers or not. This typically includes salaries and wages of staff, marketing and advertising, stationery, rents, electricity etc. There is no exact correlation between an increase in sales and an increase in these expenses – i.e. for every extra unit sold, there is not an obviously corresponding extra unit of cost in this area.

If you do sell services your business is unlikely to have direct costs, so all of your costs will be indirect – Check with your accountant or Bookkeeper if you are unsure and for more information see this previous post- Costs Explained

Step 2 – Use your Basic Financials to distil 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.[/twocol_one]

simple business dashboard

Purchase a DIY Worksheet Template – to download
All set-up and ready for you to populate your own SME Dashboard.
Use our Excel Spreadsheet with 8 Key Business Indicator Graphs to transform your raw data, locked away in your accounting system, into valuable knowledge for improving your profits….

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 loan if 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 i.e. 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 i.e. cash in hand on sale, the better.
  3. Fixed Costs – Fixed Cost Ratio = Fixed Costs divided by 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

Remember, no financial reports used in business make any impact on business performance by themselves. It is the actions you take, based on the information contained in these reports, which make the difference.



Don’t want to set up your own dashboard?… Here is one ready and waiting to improve your business profits: