Many business owners are not well versed in accounting and finance and tend to avoid these areas. But there is an old saying “We manage what we measure”. As a business owner you need to get in the habit of knowing what your critical numbers are, producing reports that track these numbers, and then reviewing the results.
Every industry has a financial Achilles heel that, if not carefully managed and monitored, can cripple your company. For example, in the
· Restaurant business, it may be your food and labor costs as a percentage of sales.
· Retail industry, it may be rental charges or costs per square foot
· Consulting service, it may be revenues per professional.
· Manufacturing, it may be inventory turnover or percentage of defective returns
Knowing what to measure requires a basic understanding of a few essential accounting terms.
- Balance sheet
* Accounts receivable
* Accounts payable
* Debt
* Equity
· Income statement
· Cash flow statement
A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
An income statement is a financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash, and breaks down the analysis to operating, investing, and financing activities. This document is critical because it helps you understand why, even if your company appears to be turning a profit, you don't have much money in the bank.
In business, cash cycle is king. If more money goes out than money coming in it's the death knell for your business.
To manage your company to success, you should make a summary financial report (a dashboard) that provides at-a-glance views of key performance indicators (KPIs) data.
The idea behind a dashboard is to provide a concise, but accurate view of business performance so executives can get the information they need to better manage the business.
What is a KPI? A key performance indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. KIPs are different between industries.
How many KIPs should you track? Three to five is generally a good number.
Once you know which KIPs you are going to measure you need to compare them with your industry’s standard: For example: the restaurant industry has the following KIPs.
Food costs: Measures the percentage of each sales dollar that is required to cover the cost of food, beverages, and paper supplies. 28-30% of total food sales
Store labor: Measures the percentage of each sales dollar that is required to cover the cost of store labor. 20% or less of sales. Note: ideally, management salaries should not exceed 10%.
Prime cost (total food, beverage, and labor): Normally, when the prime cost exceeds 60%, it is difficult to maintain an acceptable level of profitability.
Earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR): It represents the amount of cash available to cover fixed charges – rent and debt service.
Liquor costs: 20% or less of liquor sales
Do you know the KPIs for your industry and more importantly, do you know and track your business's KPIs?
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