There’s No Podium Finish in Business: So How Can you Measure Your Performance?
As a small business owner, measuring your business as a whole to see where you stand is a great undertaking. You should be, by now, measuring metrics within your business to ensure each part of your business is operating well, but getting a good idea of how you compare to your competitors can be more of a challenge. For a smaller business, employing a CFO or in-house accountant may not be an option as they’re often big investments. You’ll need the knowledge that comes with a qualified accountant to help you pinpoint where you stand. So, instead of bankrupting yourself for the sake of identifying your place in your industry, we’re going to explore how to go about how to check your business’ health in an affordable way – and how to maintain it.
The pit stop: time for a business health check
Speak to a Management Accountant (essentially the same as a VCFO) to understand where your business stands right now. They won’t have all the answers but they will allow you to focus. By checking your actual data, the accountants are able to build you a forecast to see where you’ll be in the future. This will identify areas that are in need of some serious attention, and with FUTRLI’s Management Accountants, you’ll be able to come together to strategise how to combat any worries. Once you’ve spoken, you’ll be able to prepare yourself for months ahead which might see a slight downturn in profits and how you can implement change to prevent it happening. They will ask you where you want to be in a given time period and help you get there, and can even set up alerts for every KPI that needs it so you won’t be going over budget again any time soon.
If you grow your gross profit, you can speed towards your goals
Gross profit is a measure of your efficiency in generating profit from sales. It’s the return you make on sales after taking into account the cost of production or providing a service. It needs to be high enough to cover your fixed costs such as rent and back office staff so that your business is profitable overall. So, to ensure you are making enough, it’s time to start forecasting if you haven’t already. Bringing in new business costs. You might be paying out for marketing, or the commission of a sales person, therefore you need to understand how much acquiring a new client will cost you. Having a forecast is the best way to have a quick look at the state of your business. You can see if you’re on track instantly – soon enough you’ll be checking it multiple times a week.
So, if cash is tight, it would be advisable to look at nurturing existing clients and leads. Upselling and cross-selling can bring in much-needed revenue, while contacting leads that were never closed may now be ready to sign up to your services. When you are selling, find your customers’ pain; if you’re talking to a potential customer, you need to work out what is causing them problems. Structuring your sales pitch around this is much more likely to be effective than following a script.
There are four components to revenue which need your attention:
- Market penetration – this method is all about increasing revenue from your existing clients using your existing offering of products or services. Depending on the market you are operating in, this can be best achieved through increased promotion, price reductions (if they will encourage more sales), price increases (if you can get away with this) or better routes to market, for example using online distribution or selling through a third party.
- Product development – as the name suggests this is all about increasing your offering that can be sold to your existing clients. Does your product create additional needs? Can you leverage your brand? Also, consider whether you could be earning commission by providing click-throughs to complementary products or services.
- Market development – this is about finding new markets for your existing offering of products/ services. With lower barriers to international trade, this can be about globalising your firm or it can be simply about finding another market segment that could be potential customers.
- Diversification – this is the risky, when-all-else-fails strategy. Many great minds in business (Richard Branson excluded) will advise against it. It is about developing and selling new products/ services to new market. It usually involves going outside of your areas of expertise along with a development period that will need to be funded. Some form of capacity, a good idea and a chunk of money in the bank could be a good argument for it.
If you don’t know where to start with benchmarking, select one process/service to measure and identify the relevant KPIs and simply collect and analyse the data which will highlight opportunities for improvement. The benefits of benchmarking are limitless. You could lower the cost of labour from using machinery rather than people, for example, as benchmarking would alert you to a person’s restricted efficiency. There’s a huge amount to be gained from efficiency and this is a key method of identifying it all.
Starting internally is a great way to get used to the process. Work out who your best performer is to get yourself started. Functionality built into online accounting systems such as tracking and classes in Xero and Quickbooks online lets you track sales (and even costs) by sales person making it so easy to see your best performers.
You will inevitably hit capacity with your current business set-up. When that happens you need to be ready. Scope out new markets (get out there and see them for yourself!) check out new premises, workshops, and if new staff are needed to support this.
In other words: plan, plan, plan!