Why you should focus on quality, as well as quantity
Keeping an eye on business performance is something most business owners do instinctively. However, Head of Client Risk and Analysis for Macquarie Business Banking, Adam Ortmann, believes that many critical factors for determining business performance are often overlooked, and addressing them could be the difference between success and failure.
"Anyone can look at numbers on a spreadsheet and there are many metrics you can focus on," he says. "But for me, some of the more interesting information about a business and its performance are the qualitative aspects – such as staff and client turnover rates or engagement levels."
Ortmann says it's essential to understand what success looks like to you. "If you just focus on one metric, such as client and revenue growth, you may end up peddling faster to stay in the same spot – your expenses keep increasing, and the bottom line doesn't change."
So what should you be measuring?
Qualitative data, such as staff or client satisfaction, are other ways to view the success of your business. Best practice metrics will differ by industry and you should be setting your own performance benchmarks.
"In real estate agencies for example, we see high performing businesses measure the amount of recovery they get from advertising – in some cases this is greater than break even, yielding a profit for the business. In general, it's good practice if they can cover their fixed expenses with property management fees, so sales revenue can fuel profit growth."
Other factors common to businesses across many industries might include client conversion rates, income per staff member and the health of your lead pipeline. By defining benchmarks for your own business and regularly keeping track of business performance against those benchmarks, you'll be better placed to assess the overall health of your business.
Get a second opinion
"It's good business practice to review cash flow and your other key profit metrics once a month, but it can be hard to hold yourself accountable when you're a small firm without a Board to report to. Sometimes you need an external perspective, and that's where your Macquarie Relationship Manager is happy to help, at your discretion."
Ortmann also believes getting feedback from staff and clients should be an integral part of measuring business success, as both groups want to believe they are valued.
"At least once a year, touch base with clients and ask them how things are going from their point of view. It could be a face-to-face conversation or an anonymous survey – give them the opportunity to share feedback or ideas with you. A true relationship is a two-way street. Really listen to their responses and use them to improve your business. Sometimes negative or constructive feedback can be difficult to hear or read, but when you start to sense common themes, it becomes enlightening," says Ortmann. It is also an opportunity to respond and resolve any issues.
Avoid analysis paralysis
With all of this in mind, it's important to note that over-analysing can negatively impact your business as much as under-analysing it.
Ortmann believes it's critical for businesses to define what success looks like for them in order to make the best decisions for the business and focus on the important data they want to hold themselves accountable to.
There are so many metrics you can use to measure your business, and you could get to a point where the analysis loses its relevance. Focus on the three to five most important drivers of success in your business, and then make better investment and strategic decisions based on the analysis of these drivers.
For example, if success means profit growth, one driver could be leveraging the skills of your existing staff. So a basic measure could be their productivity (revenue/profit per full time employee) but perhaps the question you need to be asking is what investment are you making in them to get this result? Is it more technology support, more training, or sharing what your business plans and goals are so they buy into your success?
Look over the garden fence
It is also beneficial to see how you are tracking in comparison to your peers. Speak with your Relationship Manager if you'd like a copy of the latest benchmarking report for your industry.
Adding in some time to your busy schedule to monitor these additional performance metrics can really pay off in the long run and help shape the future of your business.
Benchmarks for better margins
If your business has regular revenue and cash flow, Ortmann says these benchmarks are a good rule of thumb for maintaining healthy margins:
- 30% operating expenses
- 30% salaries
- 30% profit
- 10% occupancy costs
What if things change?
If you’re not hitting those profit or cash flow targets, then you need to ask some more difficult questions.
As a base, work out how much you need to draw from the business to keep your lifestyle going. You may need to reverse engineer your financial targets,” says Ortmann. “Ask yourself what discretionary costs could I cut tomorrow if revenue reduced – such as a key client left or market conditions changed?”
These could be items like travel, client entertainment, hiring external consultants or extra administrative support.
“Back in 2008, many business owners realised they could manage with less. They understand the difference between what’s essential to run the business and what you do to improve or invest in the business. It’s an important distinction.”
By focusing on the costs you can control, you may be able to maintain profitability – even if revenue dips.
Check your assets and liabilities
As well as checking expenses, you need to understand where your assets and liabilities are. If money is available, you may want to pay down some debt, such as an overdraft or mortgage, to have more flexibility for your Plan B.
“Businesses with a strong balance sheet are better placed to seize an opportunity in a rapidly changing market,” says Ortmann. “For example, if an acquisition opportunity comes along you may be able to take it up before your competitors – because your financials are in better shape.”
It is also vital to keep a close eye on potential cash flow bottlenecks in stock balances, work in progress and especially overdue debtors. If you aren't being paid on time, you’re effectively financing your customers at the expense of the interest on your overdraft – or at the very least, cash that would be better spent growing your business.
Taking the time to regularly review your profit and loss and budget forecasts is simply good business practice. When growth predictions are a little uncertain, it’s more important than ever. You may be striving to make more – but first make sure you have a Plan B if things don’t go as planned.
Warning signs to watch for on your profit and loss
- Increasing sales and declining profits
- Stagnant revenue
- Increasing interest if you’re funding client payment terms or receivables
- Increasing fixed expenses (such as utilities, salaries and rent)
- Increased depreciation with no added fixed assets
- Increased cost of goods sold
- Profit and cost percentages worse than industry benchmarks.