Imagine watching a football match where nobody keeps score.

The players are running around, everyone is working hard, the crowd is cheering, but nobody knows who’s winning.

Sounds ridiculous, doesn’t it?

Yet that’s exactly how many business owners run their businesses.

They’re working long hours, employing people, making sales, paying bills and dealing with customers.

But ask them how their business is actually performing, and many can’t give you a clear answer.

• They might know their turnover.
• They might know how much money is in the bank.
• They might even tell you they’re busier than ever.

But here’s the question:

Are they actually making more money?

And more importantly, how do they know?

Welcome to the world of KPIs

KPI stands for Key Performance Indicator.

Put simply, KPIs are the numbers that tell you whether your business is heading in the right direction.

Think of them as the dashboard in your car.

When you’re driving, you have a speedometer, fuel gauge, temperature gauge and warning lights.

Imagine driving without any of these.

You wouldn’t know how fast you were travelling, whether you were running out of fuel or whether your engine was about to overheat.

Yet plenty of business owners are effectively driving their businesses without a dashboard.

They’re relying on gut feeling, their bank balance and the hope that everything will work out.

Hope is not a business strategy!

The 10 numbers every business owner should understand

There are hundreds of potential KPIs, but you don’t need to measure everything.

You need to measure the things that actually drive your business’s performance.

Here are 10 worth considering:

1. Revenue growth
   Are your sales increasing or decreasing? And are they growing faster than your costs?

2. Gross profit margin
   How much money are you making after paying the direct costs of delivering your products or services? Increasing sales means very little if your margins are shrinking.

3. Net profit margin
   For every $100 of sales, how much profit are you actually keeping? This is one of the most important numbers in any business.

4. Cash flow
   Are you generating enough cash to pay your bills, meet your commitments and fund future growth? Remember, profit and cash flow are not the same thing.

5. Debtor days
   How long does it take customers to pay you? You might be making excellent sales, but if your customers aren’t paying, you could still find yourself in financial difficulty.

6. Customer acquisition cost
   How much are you spending to attract each new customer? There’s little point spending $2,000 to acquire a customer who only generates $500 in gross profit over their lifetime.

7. Customer lifetime value
   How much gross profit does an average customer generate throughout their relationship with your business? Sometimes the greatest growth opportunity isn’t finding new customers. It’s doing more business with the customers you already have.

8. Employee productivity
   How much revenue or gross profit is being generated per employee or productive hour? Are your staffing costs delivering the results you expect?

9. Customer retention
   Are your customers coming back, or are you constantly replacing those you’ve lost? Keeping existing customers can be far more profitable than continually chasing new ones.

10. Return on investment
    When you invest in new equipment, marketing, technology or additional staff, are you getting an acceptable return? Every dollar invested in your business should have a purpose.

Here’s where it gets interesting

Let’s say two businesses each generate $3 million in annual revenue.

Business A makes a 5% net profit.

That’s $150,000.

Business B makes a 15% net profit.

That’s $450,000.

Same turnover. Same industry. But one business makes an additional $300,000 every year.

Why?

It could be better pricing, stronger margins, improved productivity, lower overheads or more efficient systems.

The point is that without measuring the right numbers, you may never identify where the opportunities are.

And here’s something even more powerful…

If Business A could improve its net profit margin from 5% to just 8%, its profit would increase from $150,000 to $240,000.

That’s an additional $90,000 in annual profit without increasing sales by a single dollar!

Now that’s worth paying attention to.

What gets measured gets managed

I regularly see business owners focusing heavily on turnover.

They want more sales, more customers and more work.

But more turnover doesn’t automatically mean more profit.

In fact, sometimes it creates more problems.

• More staff.
• More equipment.
• More working capital.
• More debtors.
• More stress.

Would you rather have a $5 million business making $200,000 or a $3 million business making $600,000?

I know which one I’d prefer!

The objective isn’t simply to build a bigger business.

It’s to build a better, more profitable business that generates cash and creates wealth for its owners.

And you can’t do that effectively unless you understand your numbers.

My challenge to you

Here’s what I want you to do over the next 30 days.

Identify the five most important KPIs for your business.

Not 25. Not 50.

Just five.

Work out where you’re currently performing, set a realistic target and start measuring them every month, or more frequently where appropriate.

Then ask yourself three questions:

1. What is working well?
2. What isn’t working as it should?
3. What are we going to do differently to improve the results?

And most importantly, take action.

Because measuring KPIs without doing anything about them is like stepping on the scales every morning and expecting to lose weight without changing your habits!

The bottom line

You cannot manage what you don’t understand.

And you cannot consistently improve your business if you don’t know which numbers are driving its performance.

Successful businesses don’t just look at their financial statements once a year when their accountant prepares their tax returns.

They regularly monitor their performance, identify opportunities and make informed decisions.

So, here’s my final question:

If I asked you today what your five most important business KPIs are, what your targets are and how you’re performing against them, could you tell me?

If the answer is no, perhaps it’s time to change that.

Remember: Turnover is vanity. Profit is sanity. Cash is reality.

At Indigo Financial, we believe your accountant should do much more than prepare financial statements and tax returns. We want to help you understand your numbers, improve profitability, strengthen cash flow and build a more successful business.

If you’re not sure which KPIs you should be measuring, talk to us. We can help you identify the numbers that really matter and develop a practical plan to improve your business performance.

Contact Indigo Financial on (08) 8212 8585 if you need help with understanding any of your accounting, taxation and business development needs.