All businesses strive to be profitable. However, achieving success can be difficult, especially with multiple lines of business. Selling a high-margin product may seem like a cash bonanza until the moment (sometimes many months later) when the business reviews the actual expenses associated with the product, such as marketing, sales team, more intensive labor costs, storage and so forth. Having a firm grasp on the profitability for each line of business while juggling different services and products can be a challenge.
The key to gaining control is implementing a strong performance measurement system. Performance measurement helps organizations keep better track of their profitability, providing real-time reports that show areas of strength, weakness and opportunity (http://www.infoentrepreneurs.org/en/guides/measure-performance-and-set-targets).
To get started, integrate the following performance measurement processes into your routine.
Financial reports are a business owner’s best friend. A good reporting system reveals the effectiveness of the company’s management team, how the business is performing, and helps management monitor if the organization’s actual results are matching expectations.
Lucrum helps our clients set up their chart of accounts, departments, location tracking, and other key aspects of their business to make it easier to see key performance indicators (KPIs). A dashboard and metrics reflect the various aspects of the business that affect profitability. (To learn more about Financial Dashboards, view Lucrum’s video.)
Some of the KPI’s we have created for clients include:
- YTD Revenue vs. Prior YTD Revenue – Gross revenues are a great topline measurement tool.
- Change in debt YoY – Debt has a significant impact on cash flow and company health.
- Profit margin by product line – Which area of your business is making the most money?
- Break-even analysis – Is old run-down equipment costing us more in repairs or are we outsourcing things we should bring in house (rental equipment, consulting, trucking)?
- Revenue per employee/sales person/crew, etc. – How efficiently is the business generating revenue? Do additional employees generate revenue or just add to overhead?
- Number of clients added or lost or both – Is the company growing with referrals, or churning business?
- Days to break-even – How many days were required just to cover the overhead?
- Fixed cash burn – This figure helps determine the minimum cash flow required just to keep the doors open.
Good bookkeeping is essential to measuring a business’ success in real time. “A business needs to know where its money is going,” says Debbi Silva, Accounting Specialist for Lucrum Consulting. “Having a robust bookkeeping system in place provides accurate descriptions on which products and services are more profitable than others. Business owners need to know where their business is growing or falling short.”
Entering expense information in a timely manner and then reviewing the numbers routinely is a vital part of management. Good bookkeeping helps calculate profitability and can shed light on how to increase business sales.
One more way to measure a business’s performance is by benchmarking against the competition. Comparing business practices against other companies in the same industry is a healthy way to stay competitive in the marketplace. While gathering the competition’s numbers may be challenging, there are resources such as trade associations and commercial market reports that will provide the detail needed to get started. When comparing the numbers, use the information to improve business operations and set performance targets to potentially reach in the future.
Effective performance measurement systems excel at showing owners where business is improving, which products and services are selling, which are profitable, and what changes need to be made. Business owners who successfully implement this process will be able to replicate success across all lines of business and pinpoint their company’s trouble areas more quickly.
If you need help tracking your business’s expenses or developing strategies to increase profitability, reach out to the Lucrum Consulting team for assistance. We can help you identify a performance measurement system that will work for your business structure and chart the course for your business success.