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Get to know your business fundamentals

13 June 2018

We know running a business is tough. It can sometimes be difficult to look where you’re going, rather than where you’ve come from. However, it’s important to make time to learn where your business is heading, and how you’re going to get there.

This article will provide you with an outline of the fundamentals you need to know to monitor and improve your business performance.

Monitoring performance is key to a healthy, successful business. It is common, especially for established businesses, to have a set-and forget mentality and find themselves reacting to past results, missing opportunities and wasting resources.

Getting back to basics with a few key measures in place, can help you to get a better grip on the key financial ratios, and leverage them to reliably forecast and improve upon your monthly results.

Plan

Set in place a solid future plan for your business, with clear goals, and achievable performance indicators. It’s important to note that a performance indicator is only useful if it’s a critical measure of the future success of the business. For this reason, having clarity around the business goals and future plans is essential.

It is a common goal of businesses to improve profitability as much as possible, however, being too broad can limit clarity in your plan, and may lead to deviations which can hinder your business rather than help. Think about the specifics of how you wish to achieve your goal, such as penetrating new markets or sourcing more efficient manufacturing processes for example. Once the specific goals are identified, appropriate measures can be pinpointed and monitored.

Collect data

It seems the big conversation in business for the past five years has been centralized on data. What to do with it, how to use it, and how to keep it safe. Knowing your numbers and collecting as much data as you can about your business will assist in developing and utilising the most relevant monitors of performance. Using your data can benefit your business processes in departments from accounting & finance, marketing & sales, and staff management.

Cloud accounting software has been a game changer for many businesses in this respect for gathering timely financial data. Most cloud accounting software incorporates functionality that is the latest and best practice, including the introduction of Single Touch Payroll in 2018/19.

Choose your measures

With your business goals in mind, and armed with key financial and non-financial data, you are now in a position to develop key performance indicators (KPIs).

KPI measures act as alarms alerting when and where an area of the business requires attention. For example, if your sales team are not meeting their KPIs, this is in an alarm to management to leverage a new tactic to help staff, and the business achieve the goals set in place.

Being armed with this information assists in assessing the strength and weaknesses of the business. It can aid in the development of strategies to manage those ‘pain point’ areas, where improvements are required.

Be mindful that many common financial ratios measure past performance. The most successful businesses however make decisions on result drivers so using KPI’s with a mix of both lag and lead indicators may assist in identifying early warning signs.

Interpret and monitor

Once you’ve established your plan, collected data and set key measures in place to quantify the success of your plan, the next step is to interpret and monitor your results.

Whilst some business owners may be able to identify their Gross Profit for any given year, this information is only useful and relevant if you have a clear understanding of the meaning of the ratio and how it compares with factors such as:

  • Previous performance
  • Industry benchmarks
  • Expected performance (budget)
  • Competitors

Knowing and understanding some common key financial ratios can help businesses get back to basics and back on track. Remember to monitor regularly and adjust KPI’s as business goals evolve.

We have created a Key Ratio Cheat Sheet to help you understand and measure your business performance to reach your goals. Download the cheat sheet by clicking the link below:

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