Understanding Business Finances and Results- Part 3

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Last month, Rob introduced Key Performance Indicators or KPI’s and which KPI’s to measure. Let’s round out our mini-series with a few ideas on what to do with that new knowledge, but before we go, thanks Rob it has been an insight and well worth the read…….

 

How often do we measure

The frequency in which KPI’s are measured is also important. Like everything else there is a balance to be achieved here, between having a long enough period to measure the KPI over for it to be meaningful, but not too long that we are not tracking trends quickly enough to make decisions important to the effective management of the business.

To explain this, we will analyse the previous examples of KPI’s for the Car Wash:

  • Sales – this could be a weekly measure, given that payment facility accepts coins and credit cards weekly is an appropriate period to allow the clearance of the coin hopper and collation/reconciliation of the money collected with the merchant clearances.
  • Number of Car Washes – this measure (if the machinery allowed for it) could be reported on a daily basis to allow for the owner to have their finger on the pulse of what is happening. These figures could also be used to assist with the reconciliation of the weekly cash sales figure to ensure accuracy.
  • Percentage Split of Washes between Standard and Deluxe – measuring this on a monthly basis would be appropriate unless the owner wanted to track more often. An instance where this would be the case is if a promotion was being run to upsell customers into a Deluxe Wash and therefore it would be appropriate to measure more regularly to gauge the success of the promotion activities.
  • Gross Profit and Margin – measured monthly based on the calculation required, remembering some expenses that contribute to this measure may only be invoiced once a month to the business.
  • Net Profit and Margin – measured monthly on the same basis as the Gross Profit and Margin.
  • Number of Washes till next service of machinery – measurement will depend on the average time periods between services. For example, if the service periods were 2 years apart then measuring quarterly may be appropriate.

 

For each measure it is important to ensure that you are measuring often enough that it provides meaningful data to provide guidance for making decisions within the business.

 

What do we do with the information?

Once the systems are in place to measure the appropriate KPI’s with the appropriate frequency, the final step is to determine how to analyse the information that will assist with running the business.

There are several ways to do this and listed below are just a few examples:

  1. Budget vs Actual analysis – Setting targets for each of the KPI’s then comparing the actual results to those targets can provide information as to whether the business is on track to perform the way that it is expected. Where KPI’s are falling short of the target, determine what is causing it and take corrective action.
  2. Trend analysis – By monitoring consecutive periods and the same period from previous years, trends in business performance can be identified and acted upon.
  3. Outlier analysis – Here look at all the KPI’s as a suite and look for any measures that are not performing in the same way as the others. For example, the number of total washes was consistent over time but in comparison the Sales figures were increasing and the percentage split between standard and deluxe washes was increasing for deluxe washes. This is good news with regards to customers buying the more expensive service but not so good news in that net customer growth doesn’t appear to be happening. Therefore, marketing efforts could then be directed towards new customer acquisition.

So, you should now be armed with enough information to make informed decisions based on receiving the right information telling you what is happening in the business.

You know the score is important, you should understand the business model, know which KPI’s to measure, how often they should be measured and finally what to do with the information once it is in front of you in black and white.

Good Luck!

 

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