Business Finance KPI's - tutorial

By Rob Connell CEO of Smeebi and Nathan Balakrishnan of Ten Forward Finance Cer=fied Accountants

Business Finance KPI’s For All -‐ Tutorial

Wednesday, February 20, 13

CONTENTS

Introduc=on 3

Educa=on 2

Conclusion 5

2


Introduc<on

Why do businesses need KPIs and real-‐<me analysis?

If you were to believe everything you read, it is both the best and the worst =me to go into business. The pressures on small businesses has never been greater.

According to sta=s=cs published by the Small Business Administra=on (SBA), seven out of ten new employer establishments survive at least two years and 51 % survive at least five years. The key reason they give for failure is mismanagement.

“Over the years Ten Forward Finance have had many clients approach us for assistance with a failing

business. In truth the majority of the issues they experience turn out to be due to poor financial

management. However , we also see another worrying trend; the lack of easy to understand ‘Real-‐

Time’ informaHon” Nathan Balakrishnan TFF

Too many business owners spend hours pouring over mul=ple spreadsheets, P&L reports and calcula=ons with liQle end product.

Whilst there are many different aspects to this problem, one issue we will look at in detail is the use of Key Performance Indicators.


KPI Defini<on:

Key Performance Indicators (KPIs) can be defined as measures that provide managers with the most important performance informaHon to enable them to understand the performance level of the organisaHon.

KPIs should clearly link to the strategic objecHves of the organisaHon and therefore help monitor the execuHon of the business strategy.

Educa<on

The act of measuring KPI promotes an atmosphere of learning in an organiza=on. According to Root Cause, the data generated from measuring key performance indicators fosters cri=cal conversa=ons. These discussions educate all personnel involved.

Vital Informa<on

KPIs provide small business owners with an immediate snapshot of the overall performance of their business. In today’s compe==ve business environment, it becomes highly important for the owner to have real-‐=me data concerning the health of his business. The small business owner should measure and track the key performance indicators crucial to the success of his organiza=on. These important KPIs provide vital decision-‐making informa=on.


Considera<ons

KPIs have a certain level of importance in an organiza=on, but only if the KPI leads to acHonable steps to achieve a goal.

For example, a company that establishes a KPI to increase customer reten=on does not have a chance of reaching this goal. The goal does not have a measurable component that results in ac=onable steps.

If the company revises the KPI to increase customer reten=on by 10 percent, it now has a measurable, quan=fiable goal.

The company must convert the measured, quan=fied data into ac=onable items to meet its goal.

Here are some examples of the type of KPI’s that you may find useful:

Improvement in Profitability

Improvement in Revenue growth

Improvement in net-‐new customers gained

Improvement in customer sa=sfac=on


What do you want from your business?

These are very important measures, but we have o]en found that the key strategies of many business owners can be a lot more fundamental. Typical ques=ons to ask are:

Are you just star=ng out, have you been running your business for a few years?

Are you looking to sell?

Would you like more free =me?

Do you want to generate enough free cash so you can be mortgage free in 3 years?

These are all key business objec=ves. Whether we realise it or not, in order to achieve them we need to set very clear and measurable target KPI’s. Let’s look at some examples of the goals that you might want to set and therefore the KPI’s that you may need to measure:

Growth Company Ltd A company in its second year. Their goal: Cashflow for growth and Owners wealth crea=on. Started with capital and loans from its two owners. Company that has two lines of income:

So]ware that is has the a license to distribute

Consultancy fees for specialist advisors to install, train

and follow up on installa=on of so]ware


Growth Company Ltd has two clear goals

Generate funds to re-‐invest in further so]ware and training.

Owners want to withdraw further funds by year 3 – pay off those mortgages.

So, where are the problems?Let’s take a look at revenue; revenue is increasing but look at Gross Margins for periodmidway through 2011. Whilst revenues dropped for consultancy, the revenue for so]waresales increased. However the margins reduced dras=cally – squeezing profits and cash. Why?

Issue: Gross marginDrilling down into GM and Revenue and COGS, it turns out the terms with the so]ware license company weren’t as good as was first thought.

KPI’s for these goals:

Debtor Days

P&L a]er tax

Gross Margin

Revenue

Current Ra=o

Solu<on:Look for ways to improve the margin: Increase consultancy work. They have approached a similar so]ware reseller with a beQer deal. They will now need to analyse this later on. So, gross margin becomes an important KPI. The monthly target will be 35%.


Solu<on:Employed a credit controller and tasked them to reduce debtor days. They have a basic wage and a bonus =ed to the debtor days result for each quarter. The business will be able to use the cash to re-‐invest in either new so]ware, key skills or for the owners to take out some large bonuses . For this they will par=cularly want to keep an eye on P&L a]er tax and Reserves Available -‐ Funds available for distribu=on. Of course as we o]en learn – the rela=onship between profit and cash at bank is o]en tenuous. The amount of =mes I’ve heard clients remark “where has all that gone?” when they see the boQom line of profit for the year.

Issue: Cash at BankBank Balance and Debtor DaysView screen showing various related KPI’s. Cash at bank. Debtor Days -‐ the =me it takes for customers to pay. It turns out this business has not been par=cularly good at chasing its debtors. They have strict terms with its consultants and so]ware licensor, all of whom they have to pay within 21 days. But their customers can take up to 3 or 4 months.


Growth Company Ltd financial ra<os

What is Current Ra<o?A liquidity raHo that measures a company's ability to pay short-‐term obligaHons. Also known as 'liquidity raHo', 'cash asset raHo' and 'cash raHo'. The Current RaHo formula is Current RaHo = (current assets / current liabiliHes). Typically a raHo of between 1.5 and 3 indicates a healthy business at least for the short term.

Growth Company LtdCurrent Ra=o has been gradually declining. Obviously a symptom of some of the other issues noted above. However, if the business is looking for finance and the bank has indicated that it needs to see a Current Ra=o of at least 3, then this would be a minimum target to set.

We all know how hard it is to get any sort of lending One of the most important and oldest financial ra=os that banks and lending ins=tu=ons use when assessing a poten=al client is the Current Ra<o. Being able to quickly and consistently monitor such a ra=o is invaluable for many of our clients who are regularly looking at op=ons – financing equipment, short term overdra]s.


So how can Smeebi help Growth Company Ltd?

We’ve iden=fied some clear issues and some targets , and we can now pro-‐ac=vely use Smeebi to track KPI’s…. Smeebi can help business owners to analyse their finances in a way that is produc<ve, prac<cal and easy

Budgets for next quarters and next year

What are the KPI’S for the next quarters?

Need to improve on Debtor days; Target

of 45.

Improve Gross Margin (introduce new

op=on of so]ware) 35%

Monitor Current Ra=o – min 3

Increase reserves by X.


Conclusion

We’ve been able to see that KPI’s are important. As well as historical analysis Smeebi also has a neat budget tool that allows planning to see impact on KPIs. Here are the key messages:

Revenue Your cri=cal income from sales.

Debtor Days How this impacts cash flow.

Profit/Loss Retained earnings for dividends and reinves=ng.

Acid Test & Current Ra<o

Will you meet your obliga=ons?

Gross Margin How’s your cost control and pricing?

Keep it Simple – 3 or 4 KPI’S

Be clear about end goals/objec=ves

Set aQainable and realis=c Goals

Ensure they can be accurately measured

Set aside regular =me to analyse

Examples of KPI’s to monitor and react to:


About Smeebi

Smeebi started life in 2011 in Finland, a]er its founders recognised a genuine need for a business intelligence solu=on designed specifically for small and medium sized businesses.

Their vision is to develop a powerful, yet, user friendly solu=on for SME’s. Unlike most other enterprise BI products on offer, Smeebi has been created around an affordable subscrip=on based model, simply ready-‐to-‐go online. Smeebi are passionate about empowering SME’s with a beQer understanding of their data, and remain focused on developing solu=ons that solve some of the key challenges that small businesses face; saving =me, keeping track of what’s going on, and ul=mately, making beQer informed decisions. Feel free to follow us or contribute to these discussions: twiQer.com/Smeebifacebook.com/Smeebi To read the latest BI news and product updates please visit our blog on www.smeebi.com/blog


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Business Finance KPI's - tutorial