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Small business confidence is the number Litmus Test of the health of our economy. With 1.2 million small businesses employing around 4 million people in Australia, we're essentially leading the recovery of our country. Starting the new year with an optimistic outlook is one thing. To remain confident throughout the rest of the year requires setting a series of short-term measurable goals that you celebrate as each is achieved.
Our partners at CFO On-Call are often asked by business owners like yourself to help them to set goals, both short-term and more distant 3 and 5 year goals. The question usually stems from the business owners not being 100% sure of what to measure to set their goals and how to set a realistic target for the future.
We've all seen the acronym SMART in relation to goals before.
Specific
Measurable
Attainable
Realistic
Time-bound
If you use this SMART methodology, you'll be well on your way but still the question remains - what should you measure?
Why you'll end up in hot water if you focus only on sales targets
For most people, the first instinct is to set a goal for revenue and work hard all year focused on growing just their sales. If you've ever heard the term 'growing broke' then you'll know that this singular focus on revenue is a ticking time bomb waiting to explode.
What happens when you land a once-in-a-lifetime contract and have neither the working capital or enough goodwill with your suppliers to fulfil the order? Or nothing as dramatic as that - and you just get a little lax with your debt collection and don't have enough in the bank to pay your suppliers in a timely fashion. They might drop your customer classification to you being a B or C class customer. You may have read Brad Sugars' article in last month's edition about classifying customers - you don't want to be a C class customer.
SPECIFIC & MEASURABLE
What to measure to achieve sustainable growth
All 5 areas of your business need to be firing well to achieve sustainable growth. Sales & Marketing, Operations, Customer Service, Finance and Human Resources. It's important to set goals in all areas and choose the one or two items from the Key Drivers of Profit & Cash flow (visit www.bean-talk.com.au to learn more about these) and your Profit & Loss that you can use to measure your success. These are the Key Performance Indicators (KPIs) of your business.
A few ‘Financial' Key Performance Indicators are:
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Gross Profit Percentage - a KPI of sales and direct costs management.
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Net Profit - a KPI of overheads and overall business operations management.
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Accounts Receivable Days - a KPI of customer payment and possibly customer satisfaction i.e. dissatisfied customers may be slow to pay.
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Accounts Payable Days - a KPI of supplier payment. If it is too low this could affect cash flow and if too high could affect service from suppliers.
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Inventory Days - a KPI of stock management. If it is too high this could affect cash flow and if too low could affect customer satisfaction if goods aren't available to sell.
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Work in Progress Days - a KPI of job/service management. If it is too high this could affect cash flow as jobs aren't being finished and able to be invoiced.
ATTAINABLE & RELEVENT
Comparing your business to similar types of business
Once you've agreed on your Key Performance Indicators you'll need to set a benchmark and then decide what's a realistic target for this KPI over a set period of time. There may be many factors that make your business unique and seemingly incomparable to others but at the heart of things most businesses will have a fundamental framework that make them comparable to others of a similar size within their industry.
The best place to start is to look at the already established Benchmarks for your industry. Most good accounting professionals will have access to these reports and should be able to give you the information you need to compare your business against the benchmarks. If your Accountant doesn't have access to these, one of our CFO On-Call partners will be more than happy to help you and the number to reach us on is at the end of this article.
TIME-BOUND
How to manage your goals over time
Once you've looked at your industry's benchmarks and decided on some realistic improvements for your business, the next step is to choose a time frame for achieving your targets. To ensure your goals are attainable it's best to set small increments for improvement - weekly, monthly and quarterly goals are much easier to monitor and manage that one great big annual target. If you've missed a weekly target, it's much easier to make that up than a monthly or quarterly target. The upside of small increments too is that if you reach the small goals along the way, the great big future goal is attained by default.
As Henry Ford would say "There are no big problems, there are just a lot of little problems" and that needs to be your approach to managing the Key Performance Indicators in your business. Break down your annual goals for the improvement of your business into weekly, monthly and quarterly targets and deal with the little slips off target as they arise. Keep everyone in the loop of how the business is progressing towards the goals with regular weekly, monthly or quarterly updates to keep momentum going.
Finally, as I said at the start, don't forget to celebrate each target you reach along the way. It doesn't have to be extravagant - a round of cappuccinos for the Accounts Department when Accounts Receivable days keep their downward trend for another week or a BBQ lunch for the warehouse staff when there's a decrease in percentage of stock returned from customers as arriving damaged for the month. Paying close attention to, and improving the smaller measurable parts of your business means things like profit and cash flow are taken care of too.
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