Empower Your Business

Accounting is Just the Beginning


How KPI’s Can Transform Your Business

More profits at your fingertipsI once assisted a business in the UK that couldn’t understand why they had no money in the bank and couldn’t pay their bills.

The business owner used a traditional accountant, who just prepared the annual financials some months after the year-end, and as is typically the case, the excellent accounting software purchased was used solely for the GST returns. What does that mean? Yes, you guessed it – no management information or regular reporting of any kind which means the business owner was, totally unnecessarily, operating completely in the dark with no idea of what was happening in the business

After discussing things with the business owner I said that what we needed was a two-fold approach, firstly to work out what the current trading figures were, and secondly, if things had gone wrong, why.

To start-off with, easy-peasy, interim management accounts (which was like falling off a log) comparing the trading results for the current year-to-date with the comparative period the year before. These were produced not on the accountant’s externally located accounting reporting software, but on the client’s accounting software (which was more than capable) to save both time and cost. This showed a substantial decline in sales, a reduction in the gross profit margin and overheads which had not been reduced fast enough to cope with the decline in sales and gross profit.

So far, so bad! But why had things gone so bad? Reach for your Key Performance Indicators (KPI’s) which measure the key elements in any business, those which are critical to business survival and success. These are the things that MUST go right for your business to be able to deliver your core products or services in a cost-effective manner which meet or exceed the customers’ needs, which are often called your Critical Success Factors. Having worked out what these are, you need to start measuring these since what you can measure you can manage and then work out how to improve. Often, these are few in number so it’s normally possible to restrict the reporting to 8 or 12 what are known as Key Performance Indicators.

In any trades business, the Critical Success Factors are normally very similar, so I knew what to look for and so I produced a KPI report highlighting the areas where I thought the problems were occurring, a simplified version of which is reproduced below. No budget figures of course, because at that point we hadn’t set targets, but at least these could be filled in later when we had worked out what we wanted to aim for.

Monthly KPI Report for Feb 2011

For the Month YTD

Actual Last Year Budget Actual Last Year Budget
Sales $74,554 $104,889   $887,656 $1,201,876  
Cash Collected $65,222 $93,445   $796,101 $1,180,665  
Gross Profit % 52% 53%   52% 55%  
Overheads $38,101 $46,123   $481,774 $571,331  
Net Profit $667 $9,468   $20,192 $89,700  
Labour Productivity % 81% 86%   82% 89%  
Value Added on Parts $6,512 $7,998   $84,116 $106,117  
Average Labour Hourly Charge $47 $53   $46 $52  
Number of Jobs Completed 199 233   2403 2711  
Average $ per Job $375 $450   $369 $443  
No. Of Customers *

6421 5158  
Average Sale Per Customer

$138 $233  
Job Enquiry Conversion Rate 74.00% 84.00%   81.00% 93.00%  
AR Days Outstanding 52 44   51 42  
Work in Progress Days Unbilled 43 34   41 37  
* Invoiced in the last two years

And what did the KPI report show us? That there had been a serious decline in virtually all the key areas:

  • Whilst the number of customers had increased significantly, the average sale per customer and the average $ per job had reduced substantially, meaning a lot more running around, more administration costs, and more working capital tied up in the business.

  • The job enquiry conversion rate had reduced by 12% meaning that more time was spent talking to customers with nothing in return.

  • Both labour productivity and the average labour hourly charge had reduced which indicated the business had become much less efficient.

  • More working capital was tied up in the business as both Accounts Receivable days and unbilled work in progress days had extended outwards.

  • Not surprisingly, cash collected had reduced substantially too.

The next step was to set some targets to get the business back to its former level of profitability by implementing a number of specific strategies for each problem area such as billing work in progress more frequently, collecting Accounts Receivable quicker, working to improve the job enquiry conversion rate by scripting and improved quoting techniques and moving the customer’s focus away from price to the benefits of using the business in the longer term, as well as introducing a powerful guarantee and re-inventing the USP (Unique Selling Proposition) of the business.

So, all this just from a quick, inexpensive look at Key Performance Indicators – a truly simple, but powerful, underutilized business improvement tool you can use to transform your business to success!

If you need help with your business performance contact Nick on 0800 ASK NICK or email nick@abac.co.nz.