Small businesses account for 99.3% of all private sector business in the UK. There has been sustained growth in the business population over the last few years contributing to 47% of all private sector turnover, totalling £1.8 trillion.
Many growing businesses have common traits, one of which seems to be a focus on key performance indicators. KPIs not only monitor progress but can also highlight any issues which need to be addressed. Here are the top five things every small business should measure:
1 Cash flow
Operating cash flow is probably the most important short-term measurement in your business. It is the most common reason that even the most profitable small businesses run into difficulties. Essentially it is the money you have left in the bank each month and is calculated by subtracting your operating expenses from your gross margin, adding in timing issues (like when you get paid vs when you have to pay your bills) and removing non-cash items like depreciation. Negative cash flow often occurs when you have to pay your bills before some customers have paid you. SMEs that want to sell to larger corporations often get bullied on payment terms and this is worth knowing before going after this business. Banks are usually very open to providing overdrafts for working capital but only if this is pre-arranged. Also try and get all your customers on Direct Debit to mitigate the effect of the late payers. Produce a quarterly cash-flow forecast every month.
2 EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation is an indicator of a company's financial performance and is essentially net income.This figure constitutes the result of subtracting your expenses from your gross profit. As the name suggests it is not adjusted for items such as interest, taxes, depreciation and amortisation. It is a good indicator of whether you are earning or losing money. It may also be a good place to start when considering your company’s value in a potential sale.
3 Profit and loss
This figure is a snapshot of your company’s income minus expenses during a specific period of time, which is generally monthly, quarterly, every six months or yearly. Knowing your company’s profit and loss over time allows you to project earnings and make realistic plans for the future, both short and long term.
4 Sales
Keeping a close eye on sales is important, as a dip could be a warning sign of trouble. In the same respect, it is important to pay attention when sales are up. Determining why business is good at the time your company is on an upward trajectory is easier than trying to figure it out later. Reacting quickly to an increase in sales also allows you to determine what you should keep doing to sustain that growth. You also need to be sure that other departments have the resources to deliver any spike in sales.
5 Gross margin
This figure reflects how much money remains after the actual cost of your product is subtracted from the selling price. If this figure is low and not sufficient to cover your operating costs, such as salaries, rent, marketing and utilities, then you're likely not selling enough, not charging enough for your products and services or not buying at the right price point.
Jola is made up of members of team that grew Griffin’s channel business from under £1m turnover and a handful of resellers in 2005 to over £20m and 700 reseller partners, before the business was sold in 2012.
The key to our success was a deep understanding of the needs of SMEs and the voice and data resellers that supply them. By appreciating the real benefit of technical innovations in communications, Griffin was able to build relevant products and services that improved productivity and saved money. Jola applies the same approach.
To find out more about Jola…
