Measure the right numbers

iStock_000072613383_Medium_1.jpg

istock_Kenishirotie
Co Founder and Director
The Bookkeepers Alliance
Share this content
1

During a time when the role of an accountant or bookkeeper is changing, Mike Foster looks at whether businesses are in fact measuring the right numbers when reviewing their improvement potential.

More often today the role of the trusted professional adviser extends beyond completing the traditional compliance work which was historically supported with basic advice to provide an overview. Many accountants and bookkeepers are now finding themselves acting in a role where they are much more supportive of the owner and the future business performance. There is also a greater expectation on effective communication so the business owner can understand the terms and statements made.

Following my recent research, there are two types of business owners when it came to understanding their financials. The underlying trend was that business owners who do not receive proactive advice often end up measuring the less important numbers and not those that drive their true business performance.

The common numbers measured by those business owners that did not take advice were turnover, cash and profit. They were not measuring, or even sometimes aware, of the numbers for focus to drive their success. After all the ‘black and white’ numbers such as turnover, cash and profit are only an outcome of other activity in the business.

The promising statistic was that the majority of the business owners asked (68%) were in fact now taking proactive advice on their numbers and the driving factor was the harsh lessons learnt by many during the recession.

So how can we encourage the business owner to look at the activity that leads to such resulting numbers and in fact measure the right activity to effectively drive performance improvements?

How much time do we spend truly understanding the goals and objectives of the business, the desired outcomes, and then creating a performance plan to achieve these? The common example to which my own accountant often refers is the desire of a business owner to sell their business as the retirement fund, but who in fact does nothing between now and that preferred sale date to create a business that is worth the desired value on retirement.

Once the big picture is understood, then everyone, from the owner and the managers to the adviser, are in a much better position to create a meaningful forecast. Forecasts for profit and cash that are then more realistic because they are importantly broken down to better understand how the numbers will actually be achieved. In the past, I was a Bank Manager and too often the turnover was at best a guess and often plucked from the air. Very few understood how many customers would be needed, at what attrition rate, at what average spend and at what acquisition cost.

So what are the KPI’s in the business that have to be achieved to deliver the desired performance? Again too many businesses will simply measure turnover, cash, profit, value, market share, number of customers etc, but again these are only results of activity and are often too late to measure for a timely impact.

One adviser gave me the example of a business that had the single objective of targeting a 25% revenue growth. They had no measurement of progress and each month the owner would just shout “We are not on target; we need to do more”. Do more of what? Perhaps if the team knew they would do it?

Another benefit of focusing on the KPI’s is that the actions will be geared towards the high pay off activities and it is then much clearer when you are distracted or interrupted from this focus.

For example, the elements that can help drive your sales are the number of new leads, the number of meetings held or proposals written, the number of referrals received and the conversion rate of your enquiries to sales. You may also measure the average income per new customer, the current pipeline value and the activity around your product specific leads or sales.

It is also worth mentioning that not all numbers are financially related. One of my old customers focused on behaviours. Some of their measures included their customer happiness reviewing the number of complaints and testimonials. Other measures included the number of proactive service calls or visits, the percentage of chargeable hours, the number of hours spent on training and the number of new ideas generated: all numbers that drove the success of their business.

So what are you measuring or encouraging your clients to measure to drive performance improvement and success?

Replies

Please login or register to join the discussion.

By DJKL
21st Mar 2016 16:51

There is a reason for old traditional measures

There is a reason for older, traditional, measures-they have stood the test of time.

Darwinian theories do tend to suggest that measures like cashflow generation and profits are perhaps key, a business with neither does diminish its chances of surviving, and all other measures are frankly pointless if the business does not survive.

Lets face it any valuation of a business is likely to start with an examination of cashflow and profits and then spread outwards, it is rare that business valuation starts with customer satisfaction, it may be a modifier re share valuation but it is not a key determinant- purchasers need to see the basic engine room of a business is sound before they start valuing the frills.

So rather than view your measures as " insteads" they maybe ought to be viewed as augments,  mere contributory drivers to the main measures.

In the current world, and in my industry, there is imho only one measure-cashflow generation.

I can short term live with good or bad measures for everything else but if we run out of cash/credit we are dead; the days of sidling up to the friendly bank manager may no longer be available.

So management of cashflow, suitability of funding, cost of funding, payback periods, investment decisions in periods of capital rationing, in effect all the old basics of the business finance course one passed a lifetime ago are still  key.

Everyone loves fads, stock picking by charts etc, but really one  goes back to the fundamentals, we only need to listen to Warren-cashflow/ moat / profit-it is that simple.

Thanks (2)