In this blog we would like to share with you some tools that Management Accountants use which will help you analyse your own business success, giving you the information needed to plan for growth and to measure business performance.
Too many businesses chug along on a day-to-day basis without being very clear on where they are going, how they are going to get there or even if they are anywhere near the “there” at all. After reading this blog, we hope you’ll have something you can use so you don’t fall into this as well.
To make your business even more successful have you thought about using Key Performance Indicators (KPIs)? A KPI is basically a measure of business’ success, however, for a KPI to be a good one it should have the following qualities.
A way to remember these is by the reminder – TRAC VW
So, a KPI must be:
- TIMELY – it must be provided in good time so that a business can take any remedial action to get back on course, weekly, monthly etc.
- RELEVANT & RELIABLE – you must be able to rely on the information and it needs to be relevant to the business success and goals.
- ATTRIBUTABLE – it must be produced as a direct result of what the business is doing and not measured against something which is out of the business’ control. For example, a garden centre may think that monitoring the weather against the volume of sales is a good measure, but they can’t control the weather, so a better measure would be the value of sales per square foot/metre of retail space.
- COMPARABLE – there needs to be consistency in what you’re measuring against, or it’s difficult to know whether you have improved.
- VERIFIABLE – the information needs to be easily seen and clearly sourced, so it can’t be disputed
- WELL-DEFINED – so anyone in the business can understand what it is measuring. There should be no doubt about what it is measuring or what goes into the figures being produced.
Let’s have a look at some good examples of KPIs.
Most people would think that KPIs are financial, most common being Net Profit and Profit Margin, however I would encourage you when thinking about KPIs, to address all areas of the business to give a rounded view as finance is just one part of a business’ operation.
A very well-known Management Accounting tool which does this is called the Balanced Scorecard which divides a business into 4 perspectives and encourages KPIs to be introduced in each one in order to keep an eye on the whole business performance.
These perspectives are:
FINANCIAL – every business wants to make money
CUSTOMER – you can’t afford to take your eye off the customer, or the customer will go elsewhere
STAFF/LEARNING – invest in the right people, develop the right skills to be the best at what you do
PROCESSES – understanding what your internal processes are and make them as efficient and effective as possible.
And examples KPIs relating to these are:
FINANCIAL – turnover, net profit, expenses as a percentage of sales
CUSTOMER – number of new customers per week/month (if measurable), retention rates, satisfaction
STAFF/LEARNING – absenteeism rates, CPD courses
PROCESSES – employee productivity, quality of products/services, leads generated and conversion rate
It has been said that if you fail to monitor the business in all these areas, it is like sitting on a 4-legged stool which has a leg missing, so you’re likely to fall off. Therefore, it’s crucial that you set realistic KPIs and monitor your company’s performance against these targets regularly. If you’re unsure around setting KPIs in your business and need assistance, talk to EFM.
Contact the EFM team via email or call 01582 516300 to set up your free 1 hour consultation.